UNIVERSITY OF CALIFORNIA COLLEGE OF AGRICULTURE AGRICULTURAL EXPERIMENT STATION BERKELEY, CALIFORNIA AN ANALYSIS OF THE EAST BAY MILK MARKET J. M. TINLEY AND MARTIN H. BLANK BULLETIN 534 JUNE, 1932 CONTRIBUTION FROM THE GIANNINI FOUNDATION OF AGRICULTURAL ECONOMICS UNIVERSITY OF CALIFORNIA PRINTING OFFICE BERKELEY, CALIFORNIA CONTENTS PAGE Foreword 3 Summary and conclusions 3 Recommendations 9 Method and scope of study 11 Terminology 12 Demand for market milk 13 Quality and sanitary regulation 22 The Bay cities market-milk supply area 29 Buying prices for market milk 41 Relation between production and prices 48 Transportation of market milk from dairies to city plants 72 Distribution of market milk and distributors' margins 80 Methods for establishing prices 94 Acknowledgments 105 Appendix: agreement between Cooperative Dairymen's League and indi- vidual distributors 106 AN ANALYSIS OF THE EAST BAY MILK MARKET 1 - 2 J. M. TINLEYs and MAETIN H. BLANK* FOREWORD During the fall of 1930 a "milk war," which resulted in severe losses to both producers and distributors, took place in the East Bay cities. The war was brought to a close on January 17, 1931, by the signing of a temporary agreement between the Cooperative Dairy- men's League and individual distributors in the East Bay area. As the League and the distributors were unable to agree on the buying price for market milk it was agreed to defer final settlement until after an investigation of the East Bay milk market had been made by an impartial agency. Interest in the study made by the Giannini Foundation of Agricultural Economics of the Los Angeles milk market and published in Bulletin 513 prompted the Cooperative Dairymen's League and the Alameda County Milk Dealers' Associa- tion to request the Giannini Foundation to make a similar study of the economic factors affecting the marketing of whole milk in the East Bay area. It was urged that if at all possible the results of the study be made available to producers and distributors before July 17, 1931, when the temporary agreement was to expire. In response to this request a study of the East Bay milk market was commenced in February, 1931. A preliminary oral report was made to producers and distributors on July 1, 1931. This bulletin presents in detail the information collected in the course of the study. Wherever possible data for the last six months of 1931 are included in the tables and charts. SUMMARY AND CONCLUSIONS The most disquieting feature of the East Bay milk market from the viewpoint of producers and distributors and public welfare has been the steady decline during the past few years of per-capita con- sumption, and even of the total volume, of milk consumed annually. i Received for publication April 28, 1932. 2 Paper No. 30, the Giannini Foundation of Agricultural Economics. s Associate in Agricultural Economics and Associate on the Giannini Foun- dation. * Research Assistant on the Giannini Foundation; resigned June 30, 1931. 4 University of California — Experiment Station Eight of the ten East Bay cities are in Alameda County; the combined population of these eight cities constituted about 92 per cent of the county population in 1930. In 1927 the average daily consumption per capita in Alameda County amounted to about 0.65 of a pint and in 1930 to about 0.57 of a pint. The same tendency for per-capita consumption to decline is apparent in San Francisco County. Con- sumption per capita in Alameda and San Francisco counties is much below that of many other cities in the United States. The decline in consumption per capita coincided with, and to a certain extent resulted from, increases in the price of market milk to consumers. Retail delivery prices were increased from 12 to 13 cents a quart in 1927 and to 14 cents a quart in 1928, which price was maintained until the last quarter of 1930, when retail prices broke as a result of the milk war. During the first six months of 1931 retail delivery prices were 13 cents a quart. This represented a decrease of only 1 cent a quart, or 7 per cent, from the prices prevailing prior to October, 1930. The decline in the retail prices of foodstuffs generally between December, 1928, and December, 1931, was 25 per cent. Since the beginning of 1929 the decrease in per-capita consumption has been intensified and accelerated as a result of the depleted purchasing power of a large part of the population of the East Bay cities. It is apparent that increased use is being made of fruit juices and canned milk, which can be substituted for some of the uses of fresh milk. Strict sanitary requirements and enforcement have been effective during the past few years in improving greatly the quality of market milk made available for consumption. About 33,000 gallons of all grades of milk are distributed in the East Bay cities daily, approxi- mately 94 per cent of this being grade-A pasteurized milk. All of the East Bay cities have more or less uniform sanitary regulations. The various city departments of health cooperate as far as possible in the inspection of dairies and plants. As a consequence, duplication of inspection has practically been eliminated. Producers and distributors consider the inspection service to be efficient and economical. The milk sheds of the East Bay cities and San Francisco overlap to a considerable extent. In May, 1931, the East Bay cities drew their milk supplies from 199 dairies with 20,400 dairy cattle. The corresponding figures for San Francisco were 194 dairies and 19,400 dairy cattle. In many instances dairies shipping market milk to the East Bay cities are situated within a mile or two of dairies ship- ping milk to San Francisco. The fifteen counties from which these Bul. 534] An Analysis of the East Bay Milk Market 5 cities draw their milk supplies have over 201,600 dairy cattle and produce over 51,700,000 pounds of milk fat, only about 30 per cent of which is consumed in market milk. The balance is converted into cream, butter, and other dairy products. As the East Bay milk shed is located within a fairly dense dairy-manufacturing: territory, it is to be expected that buying" prices of market milk will be related somewhat closely to prices of manufacturing- milk. Buying" prices for market milk (f. o. b. city plants) were increased from 73 cents per pound of milk fat in June, 1925, to 86 cents in October, 1927. From that date prices were maintained practically unchanged until October, 1930, when as a result of the milk war, prices declined rapidly to below 60 cents per pound of milk fat. During" the first six months of 1931 prices were 74 cents per pound of milk fat. The increase in prices during the years 1925 to 1927 seems to have been necessary to call forth the necessary volume of market milk. Prices of manufacturing milk were high, and produc- tion costs, as a result of stricter sanitary control, were increased. During the years 1926 to 1929 the average annual spread or differen- tial between prices paid for milk fat in market milk in Oakland and in manufacturing milk in Gustine ranged between 22.5 cents and 26.3 cents per pound of milk fat. It is stated that there was not much movement of dairymen into and out of market-milk production during these years. In 1930, however, the differential increased to 28.6 cents and would have exceeded 30 cents but for the decline in market-milk prices during the milk war. During the first six months of 1931 the spread exceeded 35 cents. The widening of the spread between market-milk and manufacturing-milk prices during the last two years was due to the relatively greater decline in the prices of manufacturing milk. While the level of buying prices of market milk in different milk sheds is governed at any one time largely by local conditions, such prices bear a common relation to manufacturing-milk prices. In some milk sheds, however, market-milk prices are much more sensitive to changes in manufacturing-milk prices than in others. In the East Bay cities, San Francisco, Los Angeles, Seattle, and the Twin Cities (Minneapolis and St. Paul) the average annual spread between the level of prices remained fairly uniform for several years. Since the end of 1929, however, the decline in prices of market milk in the other cities and especially in Seattle and the Twin Cities, in which market-milk prices are kept in close adjustment with those of manu- facturing milk, has been greater, both relatively and absolutely, than that in the East Bay cities. 6 University of California — Experiment Station The profits of individual dairies are governed largely by the relation between the prices obtained for market milk and their costs of production. While it has been found impracticable to base buying prices of market milk (or any other commodity) on costs of pro- duction, a study of the trend in prices of some of the major cost items will give some indication of the relative profitableness of dairy production at any time. Feed and labor constitute two of the most important cost items in the production of market milk in the East Bay milk shed. Both these items have declined considerably since 1929. In January, 1929, a pound of milk fat in market milk pur- chased only about 62 pounds of composite dairy feeds including hay and concentrates; in May, 1931, it purchased 88 pounds. In 1929 it required 93 pounds of milk fat to pay the monthly wages of a milker ; in May, 1931, only 89 pounds, The increase in the spread between manufacturing-milk and market-milk prices, the relatively greater decline in the prices of market milk in several other milk markets than in the East Bay cities, and the relatively greater purchasing power of market milk in terms of feed and labor, indicate that the prices of market milk during the first six months of 1931 were too high. An increase in production can be expected as a result both of the entrance of new dairymen into the milk market and of an increase in the herds of existing market-milk dairymen. It must be pointed out, however, that as new permits to ship market milk are being granted only to dairymen whose herds are free from tuberculosis, the number of new dairymen who may enter the market is temporarily restricted. An increase in production of market milk coupled with a decline in consumption affects adversely producers both of market milk and of manufacturing milk. The surplus milk produced, which has to be diverted into manufacturing-milk channels, tends to decrease the average prices received by producers of market milk and also to decrease the prices received by producers of manufacturing milk. Milk is transported from the country to city plants in the trucks of individual distributors. Although many of the costs of trans- portation have declined considerably during the past few years, the rates to dairymen have not been decreased. There is, moreover, a great deal of overlapping of hauling facilities. On many routes the volume of milk hauled by two or three distributors could be hauled in one truck and a trailer. It is evident that substantial economies could be effected if all transportation facilities were consolidated in the hands of one agency, preferably the Cooperative Dairymen's Bul. 534] An Analysis of the East Bay Milk Market 7 League. 5 Such a change would appear to be in the interests of the market-milk industry as a whole. The number of plants handling pasteurized milk (and a large proportion of the other grades of milk) declined from 21 in 1926 to 17 in 1929. By the end of 1931, however, the number of plants had again increased to 21. Five plants ceased operating during the years 1927-1929, most of them having been closed down after they had been purchased by one or other of the larger firms. During the same period three new plants were established ; three more were estab- lished in 1930, and another in July, 1931. In nearly all instances the new plants were established by former operators or employees of the plants closed down. Several of the older plants, moreover, have been remodeled and their capacity expanded by the installation of more modern and efficient machinery and equipment. The com- bined capacity of the 21 plants operating at the end of 1931 exceeded 85,000 gallons a. day, whereas the maximum amount distributed in any one day seldom reached 35,000 gallons. It is stated that the capacity of all the plants in 1931 was much greater than in 1926, notwithstanding the fact that the volume of milk handled had declined somewhat. The increase in the combined handling capacity of plants and the reentry during the past few years of so many former plant operators and employees into market-milk distribution in the East Bay cities can be attributed in large measure to an increase in distributors' margins during the years 1925 to 1930. During the last two years (1930- 1931) there has been some decline in several of the chief cost factors of processing and distribution. Trucks, gas, oil, tires, and parts are lower in price than they were two years ago. As a result of the arrangements made with the Cooperative Dairymen's League in August, 1930, distributors have been able to regulate their daily purchases of milk more nearly in accordance with what they could sell. They are able thus to avoid the losses which they had to incur formerly in disposing of surplus milk. Many of the plants have effected reduction in personnel and salaries. In spite of these facts, however, distributors' margins were again increased in July, 1931. It is probable that most of the longer-established plants have experi- enced an increase in their unit costs of handling, but this is due mainly to the fact that there are more plants handling a lower volume of milk. Wide distributors' margins contributed both directly and 5 A cooperative association comprising' about 80 per cent of the producers shipping market milk into the East Bay cities. 8 University of California — Experiment Station indirectly to this condition; wider distributors' margins will tend to aggravate and not to improve matters. A decrease in margins would tend to discourage the erection of new plants and to force distributors individually and as a group to effect economies in the handling of milk which they would not otherwise do. Buying prices for market milk have been established for several years by collective bargaining between the Cooperative Dairymen's League and the Alameda County Milk Dealers' Association. 6 The relation between these two organizations is excellent. It would appear, however, that they have been actuated in their price negotiations by the separate and immediate interests of their respective members rather than by the welfare of the market-milk industry as a whole. The League's object seems to have been to get distributors to agree to the establishment of buying prices for market milk which would be satisfactory to most of its members. The distributors, on the other hand, appear to have been willing to agree to the prices demanded by the League provided their margins were not affected adversely. Little, if any, consideration seems to have been given to the more fundamental factors affecting supply and demand for market milk and especially to the reactions of consumers to increased retail prices and to the effect during the last two years of depleted pur- chasing power on the total volume of milk consumed at established prices. Very few of those directly or indirectly associated with the production and distribution of market milk in the East Bay cities seem to have any clear ideas regarding the factors which must be con- sidered in negotiating prices. The belief seems to be prevalent that the demand for market milk is so inelastic that high buying prices and wide margins can be passed on to consumers automatically in the form of higher retail prices. While producers and distributors have developed a. system of collective bargaining which has many commendable features, buying and resale prices cannot be regulated unless both groups have at their disposal at all times reliable information relative to the factors influencing the supply of and demand for market milk. 6 An informal trade association of milk distributors in the East Bay area. Bul. 534] An Analysis of the East Bay Milk Market RECOMMENDATIONS It would seem that the maintenance of a high level of consumer demand is of the utmost importance to both producers and dis- tributors. The volume of milk that will be consumed by individuals, however, is dependent largely on the price which consumers have to pay for milk. In view of the marked decline in per-capita con- sumption during the past few years, it is strongly recommended that retail prices be reduced immediately and greater efforts be made to stimulate consumer demand by means of educational work and adver- tising. It is probable that industry advertising would prove more effective and less expensive in the long run in stimulating consumer demand than competitive advertising by individual distributors. Although the increased spread between prices for market milk and manufactured milk and the decline in the price of several of the main cost items of production indicate that a reduction of prices to dairymen below those prevailing during the first six months of 1931 would be justified, a concerted effort should be made by distributors individually and collectively to effect every possible economy in the distribution of market milk. It is to be expected that producers will oppose strenuously any attempt on the part of distributors to pass the full effect of reductions in retail prices on to them while dis- tributors' margins remain unchanged or are increased. Buying and resale prices of market milk should be adjusted from time to time so as to bring distributors' margins more closely into line with the costs of distribution of the more efficient firms. Producers and dis- tributors should consider seriously the feasibility of concentrating the hauling of milk in the hands of one agency, preferably the Cooperative Dairymen's League. Some agency should be established to collect and analyze informa- tion relative to economic factors influencing the production, distribu- tion, and consumption of market milk in the East Bay milk shed. It is suggested that this function could be delegated to a milk-trade board consisting of representatives of the Cooperative Dairymen's League and the Alameda County Milk Dealers' Association and, if possible, one or more representatives of the general public to be appointed by the two organizations. This board should employ a competent person, preferably one with an economic training and a sympathy with the problems of producers and distributors, to do this work. It does not seem feasible to attempt to establish buying and resale prices of market milk on the basis of any ''formula," While some 10 University of California — Experiment Station factors may appear to have a more important bearing" on prices than others, the interrelation of all factors should be considered in estab- lishing" prices. The milk-trade board, or whatever other agency is established, should assemble and analyze the following information: A. Consumption factors 1. Population growth in East Bay cities 2. Volume of milk consumed monthly 3. Purchasing power of consumers 4. Prices of substitutes B. Production factors 1. Number of dairies and number of cows in dairies shipping market milk (by months) 2. Average milk-fat production per cow 3. Total production of market milk (by months) 4. Prices of market milk in East Bay and other milk sheds 5. Differential or spread between farm prices of market milk and manufacturing milk 6. Purchasing power of market milk in terms of feed, labor, and other costs of production 7. Surplus (seasonal and annual) C. Distribution factors 1. Number of distributors 2. Capacity of plants 3. Margins on milk sold in different containers 4. Volume of milk sold wholesale and retail 5. Major items of cost of distribution In addition to collecting and interpreting" the above information the milk-trade board should constantly study ways and means for effecting economies in the marketing of fresh milk. The milk-trade board or representatives of producers and distribu- tors should meet at least once every three months for the purpose of deciding upon buying and resale prices for market milk, with the understanding" that changes in prices will be made only if the information available shows this to be necessary. The Cooperative Dairymen's League should take the leadership in raising the quality of milk sold to distributors to the highest possi- ble level. Greater efforts should be made to disseminate among mem- bers information about the policies and problems of the League and about the economic conditions of the milk-marketing industry. It is suggested that no attempt be made to exclude from membership Bui* 534] An Analysis of the East Bay Milk Market 11 of the League, dairymen who are able to comply with the sanitary requirements of the various city departments of health. The League should aim at including in its membership all dairymen shipping market milk to the East Bay cities. Dairymen who are not members of the League should be required to contribute to the upkeep of the League and the handling of the surplus on the same basis as members. METHOD AND SCOPE OF THE STUDY While the survey was concerned mainly with the marketing of fluid milk in the East Bay cities, the fact that San Francisco draws a large part of its milk supplies from the same area as the East Bay cities made it necessary to consider the milk-supply area in its relation to both these markets. A detailed analysis of the marketing of cream was not made, because the bulk of the market cream shipped into the East Bay cities and San Francisco is produced on farms which are not licensed by the various city boards of health to supply market milk. It was decided to concentrate attention as far as possible on those factors which seemed to have an important bearing on the mainte- nance of long-time stable conditions in the marketing of fluid milk in the East Bay area, The avoidance of periodical milk wars and other disruptive occurrences which are injuirious to all concerned (producers, distributors, and consumers) requires that the producers and distributors give more attention to those long-time forces which affect supply, distribution, and consumption of market milk. The effects of many of these forces often are either not fully comprehended or are considered of minor importance by those engaged in the actual detail of production and distribution of market milk. The results of certain policies and practices are not always immediately discerni- ble. It may be months or even years before their full effect becomes apparent and meanwhile so many other factors may have been injected into the situation that the original cause of maladjustment may have been lost sight of. Moreover, agreements and compro- mises made to ensure immediate harmony within an industry may have a disruptive influence in the long run. It is often necessary for one or the other side to forego a temporary advantage to ensure long-time stability. In view of the urgency with which information was desired by producers and distributors, it was considered that no useful purpose would be served by making a detailed analysis of existing costs of 12 University of California — Experiment Station producing- and distributing market milk. Such information, Avhile it may have some interest for individual producers and distributors, is of little value as a basis for establishing- prices of fluid milk or determining a justifiable margin for distributors. Numerous attempts, none of which have been successful, have been made in the past to establish prices of fluid milk and distributors' margins on a basis of cost of production. Personal interviews were held with producers, officials of the Cooperative Dairymen's League, distributors, the Secretary of the Alameda County Milk Dealers' Association, officials of the Berkeley, Oakland, and San Francisco city boards of health, and numerous other persons directly and indirectly interested in the marketing of fluid milk in the San Francisco Bay cities. Information was obtained from the city boards of health on the numbers of herds and sizes of herds licensed to ship market milk into these cities, The distributors supplied data on the operations of their plants during the past few years. Unfortunately, however, the records of many of these dis- tributors were not sufficiently detailed or were not kept in such shape as to be as useful as had been hoped for comparative purposes. Information on the number of dairy cows, the production of milk fat, the disposition of milk fat and the number of tuberculin-tested herds in the area from which the cities included in this study obtained their milk supplies was obtained from the records of the State De- partment of Agriculture in Sacramento. Use was also made of figures on population in the East Bay cities and the city of San Francisco published by the United States Department of Commerce, Bureau of the Census, and of the United States Department of Agriculture publications on prices of market milk in different cities in the United States. TERMINOLOGY Market milk refers to milk which is supplied to consumers in the natural fluid state or which is prepared for human consumption without being converted into any other form or product. Manufacturing milk refers to milk which is converted into butter, concentrated milk, ice cream, cheese, or any other dairy product except market milk. Milk fat refers to the natural fats in milk. Milk-fat test refers to the percentage of fat in milk. The term margin as used in this text refers to the difference between the price per unit of product paid by a distributor and the Buk 534] An Analysis of the East Bay Milk Market 13 price at which the unit of product is sold. In the case of market milk the unit of product is a quart bottle of milk. Except where otherwise stated the term distributor refers to an individual, partnership, or an incorporated company which distributes pasteurized milk. DEMAND FOR MARKET MILK Owing to its well-known food qualities, fluid milk is one of the most widely used agricultural products. That fluid milk will be con- sumed is taken as a matter of course. The reactions of consumers to prices is of prime importance. Unfortunately, however, consumer reactions to changes in price are not always apparent immediately. Because consumers do not immediately take appreciably more milk if prices are decreased 1 cent a quart or appreciably less milk if prices are increased 1 cent, it is concluded that the price of milk does not have much influence on consumption; or in other words that demand for market milk is relatively inelastic. While this is undoubtedly true over short periods of time, it is nevertheless equally true that over longer periods of time consumers do adjust their consumption of market milk somewhat to changes in prices of milk or of substitutes for milk, or changes in their purchasing power. A price that may result in the selling of a certain volume of milk when business condi- tions are good may result in a greatly decreased volume when there is much unemployment or if the earnings of those who are employed are curtailed. Furthermore, there are many commodities such as fruit juices and concentrated milk which can be substituted for some uses of market milk. If the prices of such commodities decline relative to those of fluid milk, or if their consumption is increased through advertising or some other means, the demand for market milk will fall off. It may take months or even years before consumer reaction to changes in price becomes apparent in lower per-capita consumption. Producers and distributors watching their daily sales may see scarcely any change in the volume of fluid milk distributed. Perhaps there may be no absolute change. A decrease in per-capita consumption may not result in a decrease in the total volume handled. If the volume of milk sold does not increase with the ordinary growth of population it is an indication of a decreasing per-capita consumption. On the other hand, a decrease in the volume of business of individual distributors or the failure of such volume to increase with growth of 14 University of California — Experiment Station population may be attributed to loss of customers to other distribu- tors. Competition between distributors is continuously resulting in the transfer of some consumer patronage from one distributor to another. It is only when the volume of milk handled by all dis- tributors is compared with that of previous years and with the growth of population that a clear picture can be obtained of the trend in per-capita consumption. TABLE 1 Population of East Bay Cities and San Francisco Population City 1920 1930 344,177 3,487 5,703 28,806 216,261 4,282 2,390 56,036 2,462 319,427 1,505 16,843 337,775 506,676 474,883 Hay ward 5,530 11,455 Alameda Oakland Piedmont Emeryville Berkeley Albany Total for East Bay cities in Alameda County Contra Costa County El Cerrito 35,033 284,063 9,333 2,336 82,109 8,569 438,428 3,870 Richmond 20,093 462,391 San Francisco County Population, city and county of San Francisco... 634,394 Source of data: U. S. Dept. Com. Bur. of the Census. Fifteenth Census of the United States 1930, Population. 1931. The populations of the ten East Bay cities 7 and the city of San Francisco are shown in table 1. It will be seen that the population of the East Bay cities amounted to 337,775 in 1920 and to 462,391 in 1930. All of these cities with the exception of Richmond and El Cerrito are in Alameda County. The combined population of the eight cities in Alameda County was over 92 per cent of the total population of the county. The population of the city and county of San Francisco in 1930 was 634,394. Data on the total consumption of market milk are not available by cities, The State Department of Agriculture, Bureau of Dairy Control, however, publishes figures on the annual sales of market 7 The term East Bay cities as used throughout this bulletin refers to the cities of Hayward, San Leandro, Alameda, Oakland, Piedmont, Berkeley, Emeryville, Albany, El Cerrito, and Richmond, lying almost contiguously along the eastern shore of the San Francisco Bay. Bul. 534] An Analysis of the East Bay Milk Market 15 milk by counties. These data for the period 1925 to 1930 for Alameda and San Francisco counties together with population figures for the two counties are shown in table 2. As nearly all the population of Alameda County is in the eight East Bay cities, and the whole of the population of San Francisco County is in the city of San Francisco, the sales of market milk in these counties can be regarded as a reliable indication of the consumption in the East Bay cities and San Francisco respectively. TABLE 2 Per-Oapita Consumption of Market Milk in Alameda and San Francisco Counties, 1925-1930 Alameda County San Francisco Cou nty Population Milk consumption Population Milk consumption Year Total; thousands of gallons (i.e., 000 omitted) Pints per capita daily Total; thousands of gallons (i.e., 000 omitted) Pints per capita daily 1 2 3 4 5 6 1925 1926 1927 1928 1929 1930 409,530 422,601 435,671 448,752 461,812 474,883 11,163 12,568 12,942 12,549 12,057 12,322 0.597 0.652 0.651 0.613 0.572 0.569 570,536 583,308 596,080 608,852 621,623 634,394 15,392 15,762 16,325 15,791 16,077 15,051 0.591 0.592 0.600 0.568 0.567 0.520 Sources of data: Cols. 1 and 4 : Population figures for 1930 were obtained from U. S. Dept. Com. Bur. of the Census . Fifteenth Census of the United States 1930, Population. 1931. Figures for 1925 to 1929 were inter- polated from the 1920 and 1930 Census figures. Cols. 2 and 5: California State Dept. Agr. Bur. of Dairy Control. Statistical Reports of California Dairy Products, Annual issues, 1925 to 1930. Cols. 3 and 6: Figures in cols. 2 and 5 divided by cols. 1 and 4 respectively. The increase in population in Alameda County between the years 1925 and 1930 amounted to about 16 per cent and that of San Fran- cisco County to about 11 per cent. During the same period total sales of market milk in both counties have shown a tendency to decrease ; relative to the increase in population the decrease in consumption is very marked. The daily per-capita consumption of fluid milk in Ala- meda County decreased from 0.652 pints in 1926 to 0.569 pints in 1930; in the case of San Francisco County the decrease was from 0.600 pints in 1927 to 0.520 pints in 1930. While these figures are not extremely accurate they do afford a reliable reflection of the trend in per-capita consumption. It will be noticed that the per-capita consumption of market milk in the East Bay cities is somewhat higher than that in San Francisco. 16 University of California — Experiment Station This difference may be due partly to difference in retail prices between the two groups of cities and partly to differences in the characteristics of the population. It will be seen from table 3 that San Francisco has a smaller percentage of children of 14 years of age and under and a larger percentage of foreign-born whites than the cities of Oakland, Berkeley, and Alameda, the more important of the East Bay cities. TABLE 3 Characteristics of the Population of Oakland and Other Cities, 1930 Item Total population 14 years or younger White Negro Chinese, Japanese, etc. Foreign born Native White population only Of native parentage Of foreign parentage Of mixed parentage Of foreign-born white.. Oakland Berkeley Alameda San Francisco 100 21.3 94.2 2.6 3.2 14.8 85.2 100.0 49.2 19.8 12.5 18.5 100.0 20.0 94.4 2.6 3.0 17.4 82.6 100.0 56.4 15.7 12.2 15.7 100.0 22. 4" 96.1 0.9 3.0 18.1 81.9 100.0 48.7 18.7 13.7 18.9 100.0 16.7 93.8 0.6 5.6 24.2 75.8 100.0 39.5 23.1 11.6 25.8 * Alameda township. Source of data: U. S. Dept. Com. Bur. of the Census. Fifteenth Census of the United States 1930, Population" 1931. The per-capita consumption of milk in San Francisco and the East Bay cities is considerably lower than that in many other cities in the United States, as is shown in table 4. It will be seen that Chicago, St. Louis, Philadelphia, and New York City all have a greater per-capita consumption than does either San Francisco or the East Bay cities. TABLE 4 Per-Capita Consumption of Milk Place Year Pints daily 1928 1928 1928 1928 1929 1930 0.61 San Francisco County* Chicago St. Louis Philadelphia New York City 0.57 80 0.67 0.68 0.75 * County and urban population is practically the same. Source of data: Alameda and San Francisco counties from table 2. Cities of Chicago, St. Louis, Philadelphia, and New York from: Spencer, Leland. An economic survey of the Los Angeles milk market. California Ag. Exp. Sta. Bui. 513:11. 1931. Bui*. 534] An Analysis of the East Bay Milk Market 17 Reasons for Decline in Per-Capita Consumption. — It was stated above that while over short periods of time the demand for market milk is relatively inelastic, over longer periods of time consumers do adjust their consumption to changes in the prices of market milk, changes in the prices of substitutes, or changes in their purchasing power. Table 5 shows the retail prices of market milk in the East Bay cities and San Francisco during the period 1925 to 1930. It will be seen that the delivered retail price of fluid milk in the East Bay cities was increased from 12 to 13 cents a quart in 1927 and to 14 cents a. quart in 1928. Store prices, which are generally 2 cents a quart lower than delivered prices, increased from 10 cents to 11 cents in 1927 and to 12 cents in 1928. Per-capita consumption prob- ably began to decline in 1927 and became much more pronounced in the next three years. TABLE 5 Retail Prices of Market Milk in East Bay Cities and San Francisco, 1925-1931 East Bay cities San Francisco Year Price per quart delivered Price per quart at stores Price per quart delivered Price per quart at stores cents cents cents cents 1925 12 10 14 12-14 1926 12 10 14 12-14 1927 13 11 14 12-14 1928 14 12 14 12-14 1929 14 12 14 12-14 1930 14* 12* 14 12-14 1931 13 11 ....t t * Prevailing price January to October. From October to end of year prices varied because of milk war. t Prices varied because of milk war. Source of data: U. S. Dept. of Agr. Bur. of Agr. Econ. Monthly Report on Fluid Milk Markets for the United States. Monthly issues. In San Francisco retail delivery prices were 14 cents a quart during the whole of the period 1925-1930 and store prices 12 cents a quart. The fact that retail prices in San Francisco were maintained at a higher level than in the East Bay cities during the years 1925, 1926, and 1927 may have had some influence on the fact that its per-capita consumption is lower than that of the East Bay cities. Early in October, 1930, a milk war broke out in the East Bay cities. During the last three months of the year retail prices fell as low as 10 cents a quart delivered and 8 cents a quart at the stores. In 18 University of California — Experiment Station January, after the conclusion of the war, retail prices were estab- lished at 13 cents a quart delivered and 11 cents a quart at stores. In San Francisco prices were maintained at 14 cents a quart delivered up to the end of 1930. A milk war broke out early in January and was still in progress at the beginning of July, 1931. Retail prices dropped to 10 cents a quart delivered and 8 cents at stores. In the East Bay cities retail delivered prices decreased from 14 cents in December, 1928, to 13 cents in December, 1931, a decrease of .7 per cent. During the same period retail prices of the principle articles of food in Oakland (and the East Bay generally) declined approxi- mately 25 per cent. 8 During the past two. years the business depression has increased unemployment in the East Bay cities. The purchasing power of large numbers of persons has been greatly curtailed. As a result such persons give more attention to prices of goods which can be substituted for each other. Concentrated milk can be substituted for many uses of milk and cream. It is stated by several manufac- turers of concentrated milk that their sales of this commodity in California have increased greatly during the past few years and especially during 1930 and 1931. It is interesting to note that there has been a considerable decline in the retail prices of concentrated milk since the beginning of 1930, and that sales of it were featured by chain and retail grocery stores. While it was not possible to obtain detailed information on the sales, the figures in table 6 on quantities of evaporated and condensed milk manufactured in Cali- fornia and exported from the port of San Francisco indicate that local consumption of evaporated and condensed milk has increased appreciably. Production increased from 128,694,000 pounds in 1925 to 185,526,000 pounds in 1930, and exports from the port of San Francisco from 19,000,000 pounds to 28,000,000 pounds during the same period. 9 The net balance, production less exports, increased from about 110,000,000 pounds in 1925 to about 158,000,000 pounds in 1930, an increase of about 30 per cent. A large part of this increase has undoubtedly gone into consumption in California. The rapid decrease in the per-capita consumption of fluid milk and the substitution of other products for it is a matter of grave concern to both producers and distributors. The danger of substitu- tion is especially great during periods of business depression. Because s Data from U. S. Dept. of Labor Bur. Labor Statistics. Monthly bulletin on prices, wholesale and retail and cost of living. Monthly issues. 9 The exports from other California ports are negligible. The figures on exports probably include some evaporated and condensed milk produced in other states. Bul. 534] An Analysis of the East Bay Milk Market 19 of its cheapness relative to fluid milk, concentrated milk is being used in increasing" quantities in the place of fluid milk and cream by many families whose earnings have been reduced. If consumers once become accustomed to the use of evaporated milk in place of fluid milk and cream, it is probable that they will continue to use these products to a certain extent even when business conditions improve. TABLE 6 Production and Exports of Evaporated and Condensed Milk, 1925-1930 (Thousands of pounds, i.e., 000 omitted) Year Evaporated milk manufactured Condensed milk manufactured Total evaporated and condensed milk manufactured Exports of evaporated and condensed milk from San Francisco Production less exports 1 2 3 4 5 1925 1926 1927 1928 1929 115,981 119,448 159,028 143,339 155,980 177,180 12,713 6,439 12,752 14,550 16,586 8,346 128,694 125,887 171,780 157,889 172,566 185,526 19,000 20,000 19,000 22,000 24,000 28,000 109,694 105,887 152,780 135,889 148,566 1930 157,526 Sources of data: Cols. 1 and 2: California State Dept. of Agr. Bur. of Dairy Control. Statistical Reports of Cali- fornia Dairy Products. Annual issues, 1925 to 1930. Col. 4: U. S. Dept. Com. Bur. of Foreign and Domestic Commerce, Monthly and annual state- ments of domestic merchandise exported. Another factor which has had an important effect on the con- sumption of fluid milk is the increased popularity of fruit juices, especially citrus fruit juices. The health-giving qualities of the various fruit juices have been advertised extensively during the past few years. The greater use of such products as beverages without doubt has tended to decrease the consumption of fluid milk. Efforts to Increase the Consumption of Milk. — It should not be inferred that those in the dairy industry in general, and in the pro- duction and distribution of fluid milk in particular, are unaware of the value and necessity of educational work and advertising for the purpose of extending the consumption of dairy products. The California Dairy Council, whose head office is in San Fran- cisco, has a force of several employees engaged in educational work in the Bay cities. The object of this work is to increase the con- sumption of all dairy products including fluid milk and cream. It is estimated that about 60 per cent of the energies of the Council is applied to fluid milk and cream. The educational work consists of radio talks, addresses to luncheon clubs, women's clubs, and other 20 University of California — Experiment Station groups, and demonstration courses in health education which empha- size the uses of milk and milk products in the diet. In addition the Dairy Council provides schools and other interested institutions or groups with literature and posters on the dairy industry. Individual distributors also make extensive use of advertising as a means of extending the use of the dairy products they handle. Such advertising takes the form of radio programs, posters, newspaper advertisements, and signs on trucks. All distributors attempt to main- tain attractive trucks with the name of the firm prominently displayed. Encouragement is also given to schools to send classes to the various distributing plants for demonstrations as to how milk is handled. Much of the advertising by distributors, however, is of a com- petitive nature, designed to extend the sales of milk of individual firms. In some cases in the past such advertising has been harmful to the industry at large as it has cast a reflection on the quality of milk handled by competitors. All distributors have to conform to very high standards of quality, including milk-fat content, bacteria count, and solids not fat, and conditions of handling set by the various city departments of public health. All distributors standardize the milk- fat content of their milk well above the minimum provided by the health regulations. As a result there is little difference in the quality of milk and cream handled by the various distributors. Under such circumstances brand advertising is likely to be less effective than it would be where considerable variation in quality exists. It may even be harmful because it may cause consumers to become suspicious of the quality of milk sold by all distributors. It is probable that individual distributors have concluded that the tendency for the volume of milk handled by them to shrink has been due to the loss of patronage to competitors. If this were the main reason for shrinkage in volume, brand advertising would be effective. While it is true that individual consumers continuously transfer their patronage from one distributor to another, the real reason for a de- crease in the volume handled by many distributors has been a general shrinkage in the total volume of milk handled by all distributors. In such circumstances group or commodity advertising probably would give better results. It is doubtful, however, whether most of the dis- tributors have been aware of the desirability or necessity of doing this. None of the distributors appear to have realized that there has been a decrease in total and per-capita consumption. Much can be done by the California dairy industry in general, and by the producers and distributors of fluid milk in particular, Bul. 534] An Analysis of the East Bay Milk Market 21 to extend the consumption of dairy products through concerted group advertising and educational work. Nevertheless, it is necessary to bear in mind the fact that in the long run price is an important factor in determining how much fluid milk consumers will buy. If retail prices are maintained at too high a level compared with the prices of substitutes, producers and distributors face the probability of a contraction in per-capita consumption or even of total consumption. This is a problem that affects producers as well as distributors ; their interests in per-capita consumption are akin. A decrease in per-capita consumption results in a decrease in the total milk handled by dis- tributors and in the total amount of fluid milk purchased by dis- tributors from producers. If per-capita and total consumption are to be increased or the decrease arrested, retail prices of market milk must be reduced. Such a reduction will make the purchase of substitutes for market milk less attractive because of differences in prices. TABLE 7 Monthly Distribution of Market Milk in Alameda County, 1928-1930 Distribution of market milk, in gallons Indexes of seasonal variation of Month 1928 1929 1930 Total Average monthly Average daily distribution (average for 12 months = 100) / 2 3 4 5 6 7 986,048 1,017,852 1,102,691 1,036,993 1,047,400 998,318 992,697 1,011,402 1,011,249 1,045,599 1,004,494 961,623 1,004,594 930,328 1,056,705 1,012,396 1,007,142 973,649 967,782 1,032,223 1,002,008 1,050,961 1,009,318 1,003,202 1,002,056 923,023 1,006,833 966,054 1,001,668 917,893 914,922 969,086 1,005,936 1,074,227 1,017,012 1,040,209 2,992,698 2,871,203 3,166,229 3,015,443 3,056,210 2,889,860 2,875,401 3,012,711 3,019,193 3,170,787 3,030,824 3,005,034 997,566 957,068 1,055,410 1,005,148 1,018,737 963,287 958,467 1,004,237 1,006,398 1,056,929 1,010,275 1,001,678 32,180 33,779 34,045 33,505 32,862 32,110 30,918 32,395 33,547 34,094 33,676 33,312 97.7 102 5 103.3 101.7 99.7 97.4 July 93.8 98.3 September October November December 101.8 103.5 102 2 98.1 Source of data: California State Dept. of Agr. Monthly market milk statistical report. Monthly issues, 1928-1930. Seasonal Changes in Consumption. — In table 7 is shown the num- ber of gallons of market milk distributed monthly in Alameda County during the years 1928, 1929, and 1930. Owing to the fact that all months do not have a uniform number of days, the monthly distribu- tion figures have been converted to a daily basis in column 6. In order to facilitate comparison, the daily distribution figures in turn have been converted to a percentage basis in column 7. 22 University of California — Experiment Station It will be seen that the consumption of milk decreases to a marked degree during the months of January, June, July, August, and December of each year, July being the month of lowest consumption. The total volume of milk consumed is influenced to a considerable extent by the attendance at the University of California and at other colleges and schools in and around the East Bay cities. Consumption is lowest during the months when the University, colleges, and schools have vacations. The relatively lower consumption during the month of July is due to the absence of whole families on summer vacation. As there are no important vacation resorts within the limits of the East Bay cities, the departure of large numbers of people on vacation is not offset, as in the Los Angeles territory, by an influx of tourists and vacationists. Moreover, there is not much variation between summer and winter temperatures. The increase of per-capita con- sumption during the summer months that is found in places where there is a considerable variation between summer and winter temperatures is therefore not found here. QUALITY AND SANITARY REGULATION Market milk is one of the most important and at the same time one of the most perishable of food products. In order to safeguard the health of consumers most states, counties, and cities, as well as pro- ducers and distributors of market milk, have adopted standards and measures to control the quality of market milk. Some phases of public and private regulation which have a bearing on the economics of milk marketing are presented briefly in the following sections. Under the Pure Milk Act of 1927 the State Department of Agricul- ture is vested with complete authority for sanitary control of dairies and distributing plants and for promulgation of grading standards for milk and cream throughout the state of California, Grades of Market Milk. — The following grades of milk are pro- vided for: certified, guaranteed, grade-A raw, and grade-A pasteur- ized. Grade-B pasteurized milk may be used only for manufacturing purposes and may not be sold as market milk. The chief requirements for the various grades are summarized in table 8. The state law requires that market milk shall not contain less than 3.3 per cent of milk fat and not less than 8.5 per cent of solids not fat, The maximum bacteria count varies for the different grades of milk, the maximum count for pasteurized milk being 150,000. Bul. 534 J An Analysis of the East Bay Milk Market 23 I |s •O B » 2 3-g 2: 2 b 3 S"£ 3 Is >• 2 3. og i os- |£sr I 5* e a- ST 3 3. ? IS s n a 2 0- ^ (D co to OJ CO CO CO Ol CO CO CO Cn CO B B S- 5' 3 3 B 8 2 - r» P E. " 2 3 3- p B* 3 || (D 5" 2*5" EL 89 p b' 3 " ~§ S CO r* S» » B- g p 5" 3 i p »<-►>■?• i e o << V 3 1 ■ » i 8 - & i B " •* »• B F b- «2 TO S- 14- 2 o i S * 3.p 3 ° 8 3 » B, c 5^3 S-Sl 33 o Sfo 2.g 8°82p s 8*3. £ - B. SB 2-3-.*: B | <-3^ | £22-^3 >i*8 232^ c i cr3.2. S'co !! 3 2--8§^ B » 3.S- B"» O g-8^ (5 » -J. b* ST 2 2 CD g£ It a o 3. *< 5' «. S. 3 2 3 O "S 8- B C • £8.8.1. 8 * 8-jT 3 2 £ •a 2, © 5T 2- 2 3 o M e S * 5 '2 ?: ? 4 Sr 8T 5" O ► 8 3 ^ o a 2 5. 3 £ 3 3 3 cl c r > 8. 8 £ b 7: 3 8.-1 SBg.gS.8 2. S a 2 2 & ' p 2 i?§ CO a K td 24 University of California — Experiment Station The standards for the various grades of market milk as provided in the state law must be regarded as minimum requirements. Indi- vidual city health departments may and often do provide for some- what more rigid standards. Most of the East Bay cities require that market milk shall contain not less than 3.5 per cent milk fat and that the bacteria count in milk for sale as grade-A pasteurized shall not exceed 100,000 per cubic centimeter. Milk for pasteurization must be cooled immediately after milking to 50° Fahrenheit and must not thereafter rise above 60° F. Distributors are permitted to stan- dardize milk by the addition of cream or skim milk. Several of the distributors, however, standardize by adding miik with a high percentage of fat to milk with a low percentage of fat. The herds of all dairymen producing certified, guaranteed, and grade-A raw milk have to be free from tuberculosis. Except in the case of Kichmond, grade-A pasteurized milk need not be from tubercu- losis-free herds. An agreement has been arrived at, however, between producers, distributors, and the various city health authorities whereby all grade-A pasteurized milk must also be from tuberculin-tested herds after January 1, 1933. All the present dairymen are being urged to clean up their herds as rapidly as possible. Many of them have done so already. In the meanwhile, permits to ship market milk are being granted to new producers only if their herds are free from tuberculosis. On June 1, 1931, there were in the fifteen counties in the Bay cities milk sheds some 791 herds with 40,005 dairy cattle which had been certified by the California State Department of Agriculture, Bureau of Animal Industry as being free from tuberculosis. (See table 9.) Roughly, about one-third of the herds and dairy cattle supplying market milk to the two markets were free from tuberculosis in June, 1931. It is estimated that there will be more than enough tuberculosis-free herds by January 1, 1933, to supply all the market- milk requirements of the fifteen counties. Grade-A pasteurized milk is by far the most important grade of milk (on the basis of volume) sold in the East Bay cities. During August, 1930, the total volume of all grades of milk distributed in Alameda County was 1,032,629 gallons. About 973,000 gallons or over 94 per cent was sold as pasteurized milk. 10 Spencer in his study of the Los Angeles milk market found that about 70 per cent of the io Figures from: California State Dept. of Agr. Monthly Market Milk Statistical Report for August, 1931. Buk 534] An Analysis of the East Bay Milk Market 25 market milk distributed in Los Angeles County in August, 1930, was grade-A pasteurized milk. 11 Inspection Services. — The State Department of Agriculture is authorized to approve the dairy and milk inspection services of counties or municipalities maintained in conformity with its regula- tions and with the state law. Each city health authority has the right to inspect all dairies and distributing plants, the milk of which is consumed in their respective cities. One city, however, may con- tract with another city for the performance of dairy and milk-plant- inspection services. TABLE 9 Number of Herds Certified as Free from Tuberculosis, June, 1931 In 15 counties in Bay milk-supply area Herds supplying market milk to East Bay cities. Herds supplying market milk to San Francisco. . Number of dairy cattle 40,005 6,486 7,404 Sources of data: County figures from records of State of California Department of Agricul- ture, Division of Animal Industry. Figures for the East Bay cities and San Francisco from the records of the Oakland and San Francisco City Departments of Health, respectively. The following East Bay cities have health departments and main- tain dairy-inspection services: Hayward, San Leandro, Alameda, Oakland, Berkeley, and Richmond. The cities of Piedmont, Emery- ville, Albany, and El Cerrito do not have health departments. Dis- tributing plants situated in Hayward do not distribute milk in any of the other East Bay cities. , The same is true of plants situated in Richmond. Officials of the health departments of these two cities inspect and certify all herds shipping milk to their respective cities. The plants situated in Oakland, San Leandro, and Berkeley, however, distribute milk in all the East Bay cities with the exception of Hay- ward and Richmond. 12 B\y a cooperative agreement between the various city health departments duplication of inspection service is practically eliminated. All dairies are inspected at least once in very six weeks. In case a complaint is lodged against a dairyman on account of high bacteria count or low solids, an inspector visits his dairy immediately and assists the dairyman in removing the cause for complaint, If a dairy- n Spencer, Leland. An economic survev of the Los Angeles milk market California Agr. Exp. Sta. Bui. 513:15. table 5. 1931. 12 One plant in Oakland an'd the plant in San Leandro also distribute milk in Hayward. 26 University of California — Experiment Station man is unable to meet the sanitary requirements or continues to produce a poor grade of milk his permit is revoked and he will not be permitted to ship market milk again until he can give reasonable assurance that his milk will be satisfactory. In addition to the inspec- tion every month or six weeks, all dairy farms are scored by inspectors three or four times a year. In scoring a dairy special attention is given to the health and feeding of dairy cows, the kind and cleanliness of utensils, milk houses, and dairy barns, and the general care taken in milking and handling the milk. In case of a low score a dairyman 's permit may be revoked. Inspections of distributing plants are made at frequent intervals. In many instances inspectors visit plants daily. Oakland requires that distributing plants receiving grade-B (manufacturing) milk must have a full-time inspector. This is to ensure that grade-B milk is not used for market milk. Distributing plants are also scored several times a year, special attention being given to the cleanliness of the buildings and utensils and the methods of handling milk. It may be stated that all the plants in the East Bay cities obtain very satis- factory scores and put out a high quality of milk that meets the city health standards in every respect. Producers of market milk are required to pay a fee of from Y 7 to Yiq cent a gallon on all milk shipped to distributing plants; the size of the fee is dependent on the distance of individual herds from the cities. The producers' inspection fees are collected by distributors from the amount due to individual dairymen and are paid over to the respective city treasurers. Distributing plants which receive manufacturing milk are required to pay a fee of $225 a month or more, according to the amount of inspection required. It may be stated that no attempt is made arbitrarily to limit through sanitary control the number of dairymen who may ship market milk into the East Bay cities. Permits are issued to any dairyman whose herds and production facilities fulfill the requirements of the state Pure Milk Law and the various city health ordinances. The quality-control work of the various public agencies is sup- plemented to a considerable extent by the distributors and the Cooper- ative Dairymen's League. Most of the distributors regard the standards set by the city health departments as the minimum require- ments, below which patrons' milk may not fall. To build up consumer preference, individual firms aim at making available a quality of milk a,s much above the health standards as .possible. The Cooperative Dairymen 's League on the other hand is vitally interested in providing Bul. 534] An Analysis of the East Bay Milk Market 27 the distributors who purchase their milk supplies through the League with the highest possible quality of milk. This is essential if the League is to maintain the confidence and support of all the dis- tributors. Every encouragement thus is given individual producers to reduce their bacteria count below the legal maximum and to give special attention to the flavor and odor of their milk. Most of the larger distributors and the Cooperative Dairymen's League employ field men who pay frequent visits to dairies to see that a satisfactory standard of cleanliness is maintained and to give advice on the feeding and management of dairy herds. In the case of,; the smaller firms, which do not employ regular field men, the manager or some other representative visits all patrons as frequently as may be desirable. Special attention is given usually to the pre- vention of undesirable flavors and odors and to the discovery of causes for high bacteria count. All the distributors make bacteria counts of each producer's milk at least once a week. Such bacteria counts in the case of members may be checked by an official of the League. Distributors naturally show a preference for the milk of dairymen who, in their experience, have provided the quality of milk desired. As a result most distributors are opposed to frequent changes of shippers. Market-milk producers are required to erect dairy barns and milk houses that meet with the approval of the various city inspection services. All dairies shipping market milk into the East Bay are required, furthermore, to install mechanical cooling equipment. At any given time the available supply of market milk is limited to that produced by approved herds. Considerable time is necessary for a dairyman who has been selling milk to manufacturing plants to bring his dairy conditions up to the standards required for market- milk supply. The requirements as to cattle, buildings, equipment, feeding and production methods, and bacteria count necessitate a larger investment and higher costs than are involved in the production of milk for manufacturing purposes. Since added cost is involved in producing market milk, heavy loss is incurred when a surplus of market milk has to be utilized for other purposes. The various sanitary and quality-control measures developed by public and private agencies serve not only to safeguard the health of the consuming public but also to place very definite and important limitations on the area, and the number of producers in that area, from which a city may draw its supplies of market milk. If the various measures, and especially the regulations of public agencies, are uniformly enforced throughout a milk shed, transportation costs 28 University of California — Experiment Station become the chief factor in limiting the distance from which market milk can be conveyed. City health authorities or distributors in some markets, fearing that the supply of milk from the existing milk shed may prove inadequate, or for other reasons, occasionally attempt to attract an additional supply of milk from more distant parts or from producers of manufacturing milk in some parts of the existing milk shed by less rigid enforcement. To the extent that this takes place, it tends to offset the limiting influence of transportation costs or enables some producers in an area where enforcement is lax or ineffec- tive to produce market milk at a lower cost and for a lower price than producers in other areas where the sanitary and other regulations are rigidly enforced. This is bound to lead to dissatisfaction among the producers who have to comply fully with the sanitary requirements. Furthermore it may enable some distributors to procure all or a part of their supplies of market milk at a lower cost than other distrib- utors, If such a condition of affairs persists for any length of time in a milk shed it will undermine seriously the whole price and market structure for fluid milk. It will be seen that the enforcement of the various sanitary control measures provided for in the state Pure Milk Act and the various city health ordinances puts dairymen and distributors of market milk to considerable expense' in production and handling and for inspection. The efficiency and effectiveness of the dairy inspection services pro- vided by the various East Bay cities is thus of great importance to the market-milk industry. During the course of this investigation dairymen and distributors were asked to express their opinions as to the efficiency of the inspection services. Without exception the replies obtained indicated that producers and distributors were satisfied with the way in which the sanitary control regulations were being enforced. It seems to be rather generally agreed that the dairy and plant inspec- tion service has been an important factor in providing the East Bay cities with the high quality of milk that is available. As all the East Bay cities have more or less similar ordinances, the milk of any dairyman can be diverted from one city to another without much difficulty or delay. Furthermore as the various city health depart- ments cooperate to a considerable extent in sanitary control work, duplication of inspection services and therefore duplication of expense is practically eliminated. In this respect dairy and plant inspection in the East Bay milk shed appear to be much more satisfactory than that in the Los Angeles milk shed. 13 13 Spencer, Leland. An economic survey of the Los Angeles milk market. California Agr. Exp. Sta. Bui. 513:19. 1931. Bul. 534] An Analysis of the East Bay Milk Market 29 THE BAY CITIES' MARKET-MILK SUPPLY AREA The East Bay cities and San Francisco draw their milk supplies from the fifteen counties shown in table 10 and figure 1. It will be seen from this table that the number of dairy cows (2 years and over) in this area increased from 199,631 in 1920 to 203,555 in 1925 and decreased to 201,672 in 1930. From information supplied by the California State Department of Agriculture Bureau of Dairy Con- trol, it would appear that the production of milk fat in these counties increased from 45,736,000 pounds in 1925 to 51,720,000 pounds in 1930. 14 Data on annual milk-fat production prior to 1925 have not been included in the table ; for prior to that date production is avail- able only by fiscal years, whereas since 1925 production figures are for calendar years. While the number of cows decreased during the years 1925 to 1930, the production of milk fat increased as a result of an increasing production per cow. TABLE 10 Number of Dairy Cows (2 Years and Over) and the Number of Pounds Milk Fat Produced in the Bay Cities Milk Supply Area (1920-1930) Number of dairy cows Milk fat produced, in thousands of pounds County 1920 1925 1930 1925 1926 1927 1928 1929 1930 11,803 9,925 24,797 14,977 4,834 12,619 209 21,246 6,926 12,070 3,342 8,421 24,978 36,297 7,187 10,718 6,324 24,974 19,309 4,589 9,924 24,908 9,209 11,965 3,458 6,687 25,502 37,206 8,782 9,505 7,944 21,839 18,928 4,092 8,693 454 28,664 7,599 12,910 2,666 6,251 24,552 40,318 7,257 2,491 1,135 4,892 4,968 698 2,088 175 6,723 1,654 3,317 514 1,435 4,816 9,104 1,726 2,100 1,592 4,387 5,197 767 1,887 260 7,276 1,536 3,340 388 1,497 4,313 9,977 1,689 2,782 1,607 4,608 5,244 906 2,250 175 7,960 1,913 3,773 437 1,823 4,728 10,422 2,136 2,833 2,057 4,695 5,322 866 1,874 67 8,224 1,836 3,585 481 1,576 4,732 10,835 1,930 2,521 1,352 4,611 5,126 899 1,629 67 8,096 1,838 3,564 397 1,636 4,703 11,718 1,782 2,591 Contra Costa 1,709 4,735 Monterey 5,252 880 Sacramento San Francisco San Joaquin 1,915 68 8,550 1,732 Santa Clara 3,676 418 1,507 5,031 11,960 Yolo 1,696 Total 199,631 203,555 201,672 45,736 46,206 50,764 50,913 49,939 51,720 Sources of data: Figures on numbers of dairy cows from U. S. Dept. Com. Bur. of the Census. Fifteenth Census of the United States. 1930; Agriculture. 1931. Figures of production of milk fat from: California State Dept. Agr. Bur. of Dairy Control. Statistical Report of California Dairy Products. Annual issues, 1925-1930. i* See California, State Dept. Agr. Bur. of Dairy Control, of California Dairy Products. Annual issues, 1925 to 1930. Statistical Report 30 University of California — Experiment Station BAY CITIES MILK SUPPLY AREA 1931 LEGEND • 50 COWS SUPPLYING SAN TRANCISCO a 50 COWS SUPPLYING LAST BAY CITILS Fig. 1. — In June, 1931, the Bay cities drew their milk supplies from 393 dairies with nearly 40,000 head of cattle situated in fifteen counties. The milk sheds of the East Bay cities and San Francisco overlap to a. considerable extent. (Data from table 12.) Bul. 534] An Analysis of the East Bay Milk Market 31 No definite figures are available on the number of pounds of milk fat consumed in market milk in the East Bay cities and San Fran- cisco. The California State Department of Agriculture Bureau of Dairy Control, however, publishes information annually on the num- ber of gallons of market milk processed and bottled in the different counties of the state. These data for the fifteen counties in the Bay market-milk-supply area and for the counties of Alameda and San Francisco alone are shown in table 11, column 1. According to information obtained from the records of distributors in the East Bay cities and from San Francisco it would appear that the average milk-fat test of market milk did not exceed 3.9 per cent. In a gallon TABLE 11 Production of Milk Fat and Consumption of Milk Fat as Market Milk in 15 Counties in Bay Cities Milk Supply Area, 1930 Milk, gallons Milk fat Percentage of total milk fat / 2 S 51,720,000 16,000,000 9,200,000 100 47,865,000 27,373,000 31 Consumption of market milk in Alameda and San 18 Source of data: Production of milk fat and consumption of market milk in gallons from: California State Dept. Agr. Bur. of Dairy Control. Statistical Report of California Dairy Products, 1930. Milk fat consumed in market milk calculated by multiplying the numbers of gallons by 0.3354 pounds, which is the weight of the milk fat in a gallon of 3.9 per cent milk. of milk testing 3.9 per cent milk fat, there is approximately 0.3354 pound of milk fat, This figure was used to convert the gallonage figures in column 1 of table 11 into pounds of milk fat consumed in market milk (shown in col. 2). It will be seen from this table that only about 31 per cent of the milk fat produced in the fifteen counties is consumed as market milk in these counties. Approximately 18 per cent of the total production of milk fat is used in Alameda and San Francisco counties. These figures on percentage utilization of milk fat are important as they indicate that the East Bay cities and San Francisco are located in an area which produces milk fat greatly in excess of requirements for market milk. The composition of all milk whether utilized for manufacturing purposes or for market milk is substantially the same. Market milk, however, is produced under somewhat more rigid conditions regarding 32 University of California — Experiment Station sanitation and care of cows. Furthermore, while producers of milk for manufacturing purposes may allow their cows to dry during- the winter months and freshen during the spring and summer months, producers of market milk must arrange their breeding and feeding practices so as to maintain a more or less uniform production through- out the year. All of this entails some additional expense over that incurred by producers of milk for manufacturing purposes. Included in this additional expense is the compensation which the producers of market milk require for putting forth the extra care and effort involved in the production of market milk. TABLE 12 Numbers of Dairy Cattle in Herds Approved to Supply Market Milk to San Francisco and East Bay Cities (June, 1931) East Bay cities San Francisco County Number herds Number dairy cattle Per cent of total Number herds Number dairy cattle Per cent of total Alameda Contra Costa 60 26 1 8 1 68 18 13 2 1 1 5,901 3,228 472 485 280 6,414 1,510 1,690 250 150 75 28.85 15.78 2 31 2 37 1.37 31.36 7.38 8.26 1.22 73 37 15 1 41 27 5 7 18 11 61 2 2 4 1,906 100 4,545 1,930 388 1,288 1,409 1,830 4,596 254 505 669 9.81 52 23.40 9.94 1.99 Sacramento San Francisco... San Joaquin 6 63 7.26 9.42 Santa Clara Santa Cruz 23.67 1.31 2.60 3.45 Yolo Total 199 20,455 100 00 194 19,420 100.00 Source of data: Records of the departments of health of the cities of Oakland, San Leandro, Hayward, Richmond, and San Francisco. Number of Approved Herds. — The number of dairy cattle in herds approved by the Oakland 15 and San Francisco departments of health, as of June 1, 1931, to supply market milk to the East Bay cities and San Francisco are shown in table 12 and figure 1. It will be seen that 199 herds with 20,255 dairy cattle were approved to supply is Practically all the herds supplying milk to the East Bay cities have to be approved by the Department of Health of Oakland, as most of the distributing plants are either situated in the city limits of Oakland or distribute milk in the city of Oakland. , .r Bul. 534] An Analysis of the East Bay Milk Market 33 market milk to the East Bay cities and 194 herds with 19,420 dairy cattle were approved to supply milk to San Francisco. Included in the figures for the East Bay cities are a number of herds the milk from which is shipped to manufacturing- plants, whereas the figures for San Francisco include only dairies actually shipping market milk. About 75 per cent of the dairy cattle in herds approved to ship milk into the East Bay cities were in three counties, San Joaquin, Alameda, and Contra Costa. Over 76 per cent of the dairy cattle in herds approved to supply market milk to San Francisco were located in Santa Clara, Marin, Monterey, Alameda, and San Mateo counties, the two first-named counties alone having nearly half of the approved cows. It is apparent from table 12 that there was considerable over- lapping in the source of supply of market milk of the East Bay cities and San Francisco. Eight of the fifteen counties supply market milk both to the East Bay cities and to San Francisco ; in fact many of the herds supplying milk to plants in San Francisco were situated within a mile or two of herds supplying market milk to the East Bay. There was, moreover, some interchange of herds between the two groups of cities. It was stated by officials of the Oakland and San Francisco city departments of health that many of the herds supplying market milk to San Francisco in June, 1931, had formerly supplied milk to the East Bay cities, and vice versa. In spite of the fact that the East Bay cities and San Francisco obtain their milk supplies from much the same area, different buying prices have existed for many years between milk shipped to the East Bay area and milk shipped to San Francisco, the prices of milk for the latter market having averaged several cents per gallon above those of milk for the East Bay cities. Producers in the supply area thus showed a preference for shipping milk to San Francisco. The higher prices paid for milk shipped to San Francisco undoubtedly stimulated production among producers shipping to that market. The effect of this difference in prices, however, was not apparent; San Francisco did not have a surplus problem. This was due to the fact that con- tracts for the supply of milk to this city were made between individual distributors and individual producers. The distributors were thus able to "lay off" or take on shippers as their requirements varied. Many shippers were "laid off" permanently. For such shippers there were only two alternatives: they could either ship their milk to the East Bay cities or divert it to manufacturing plants. As the East Bay market already had an ample supply of market milk, most of the displaced producers were forced to ship to manufacturing plants. 34 University of California — Experiment Station The East Bay milk market is very closely related to that of San Francisco and it would seem that there is no logical reason why the buying prices for milk of equal quality going to the two markets should not be uniform. Differences, if they do exist for any length of time, are almost bound to lead to maladjustment. It is doubtful, however, whether it will be possible to bring about uniformity of buying prices between the two markets while contracts for the supply of market milk to San Francisco are made between individual dis- tributors and individual producers. It would seem that uniformity in buying prices will be effected only if all producers of market milk in the fifteen counties are organized in associations which work in close contact with regard to price negotiation. Expansion in Size of Supply Area. — While no exact data are available as to the expansion during the past few years of the area from which the East Baj^ cities and San Francisco draw their market- milk supplies, it is stated by officials of the public health departments of these cities that there has been some expansion in the supply area. Two main reasons have been advanced for this expansion. In the first place, the improvement in roads, automobiles, and equipment has made it possible for more distant producers to ship market milk to the Bay cities. In the second place, rent of land in the territory immediately adjacent to the Bay cities, especially in Alameda and San Mateo counties, has increased greatly during the past few years, because of competition for use of land for industrial and residential purposes. Dairymen finding it difficult to pay the increased rents have moved to outlying areas, especially around Tracy in San Joaquin County and Salinas and Soledad in Monterey County, where rents are considerably lower. Trend in the Number of Herds Approved to Supply Market Milk to the East Bay Cities. — The various East Bay city health departments make a list annually of all the dairies and number of cows in those dairies which have permits to ship market milk into the East Bay cities. These records for the years 1928 to 1931 are shown in table 13. Such data are not available prior to 1928. It will be seen that since 1929 there has been a decrease in the number of herds and the number of cows. Unfortunately, however, these yearly figures are not strictly comparable. Many of the dairies which had permits during the years 1928, 1929, and 1930 did not ship milk to distributing plants operating in East Bay cities, whereas in 1931 permits were issued only to those dairies which were actually shipping milk. Since the figures for 1931 were prepared several new permits were issued. It is, how- Bul. 534] An Analysis of the East Bay Milk Market 35 ever, the opinion of the various city health officials, of officers of the Cooperative Dairymen's League, and of distributors that there has been some decrease since 1929 in the number of herds supplying market milk to the East Bay cities. It was stated that the decrease was due largely to more stringent health regulations and especially to the fact that new permits are being issued only to dairymen whose herds are free from tuberculosis. TABLE 13 Number of Herds Approved to Supply Market Milk to Distributing Plants in Oakland (1928-1931) Number of Number of Year herds dairy cattle 1928 216 23,600 1929 270 24,900 1930 231 24,000 1931 197 21,460 Source of data: Records of the Oakland Department of Health. Characteristics of Dairies. — As many nationalities are represented among the dairymen in the East Bay milk-supply area, the various city health authorities and the Cooperative Dairymen's League have experienced some difficulty in getting dairymen to adopt uniform production practices and to cooperate in matters relating to the welfare of the milk-marketing industry as a whole. TABLE 14 Size of Herds in East Bay Milk Supply Area, 1931 Number of dairy cattle per farm Total number of herds Total number of dairy cattle Average size of herd 47 87 34 17 6 2 6 1,770 6,460 4,380 3,130 1,420 550 2,750 38 51-100 74 101-150 129 151-200 184 201-250 237 251-300 278 Over 300 459 Total 199 20,460 103 Source of data: Records of the departments of public health of various East Bay cities. There is a great variation in the size of the herds owned by dairy- men, as is shown in table 14. While over two-thirds of the herds consist of 100 dairy cattle or less, there are 51 herds with between 101 and 200 dairy cattle, and 14 herds with over 201 dairy cattle. The 36 University of California — Experiment Station average size of all herds in the area is 103 dairy cattle. In Los Angeles the average size of all herds in 1930 was 56 dairy cattle. 16 In contrast, it was found that in the Chicago milk supply territory the average number of dairy cattle per herd was 26 in the inner dairy district and only 17 in the outer district. 17 As in the Los Angeles milk-supply area, dairying in the East Bay territory is conducted on a specialized basis. Most of the dairymen derive the bulk of the cash farm income from the sale of milk, dairy cattle, and manure. While some of the dairymen own their own farms, many of them rent the farms on which they operate. There are, however, several important differences in the status of dairymen in the two areas. In the first place, the size of farms in the East Bay territory is generally much greater than in the Los Angeles area. Most of the dairymen in the former area raise a part of their feed requirements and can pasture their cows during the spring and summer months, whereas in most of the Los Angeles terri- tory, where many of the farms are only a few acres in extent, nearly all feed has to be shipped in. In the second place, nearly all the dairymen in the East Bay area own their herds and raise their own dairy cattle. In the Los Angeles territory, on the other hand, most of the dairy cows are shipped in from other parts of California or from other states and are purchased usually by dairymen on the installment credit plan. The equity of dairymen in their business thus is greater in the East Bay area than in the Los Angeles area, As a result, the turnover among dairymen is not nearly so great in the former area as in the latter. 18 Seasonal Variation in Production. — It was stated previously (page 22) that the total consumption of market milk was low during the months of January, June, July, August, and December. A very serious surplus problem would arise if production increased during the summer months as happens in many of the eastern and middle western markets. The result would be a high production during the months of low consumption. Prior to August, 1930, it was the practice for each distributor to establish for each of his patrons a definite quota of milk that would be purchased daily at the prevailing market-milk prices. Each indi- 16 Spencer, Leland. An economic survey of the Los Angeles milk market. California Agr. Exp. Sta. Bui. 573:22. 1931. 17 Ross, H. A. The marketing of fluid milk in the Chicago dairy district. Illinois Agr. Exp. Sta. Bui. 269:461, 540. 1925. is Spencer, Leland. An economic survey of the Los Angeles milk market. California Agr. Exp. Sta. Bui. 513:22-23. 1931. Bul. 534] An Analysis of the East Bay Milk Market 37 vidual dairyman could dispose of his surplus (quantity produced in excess of his established quota) as he saw fit. He could sell his surplus either to the distributor to whom he was shipping his milk or to condensaries in the country at manufacturing-milk prices. Furthermore, it was the practice of some distributors to "lay off" some producers during the spring and summer months when the sup- plies of market milk exceeded requirements for distribution purposes. Additional producers were taken on again when dealers' requirements increased. Because of the manner in which market milk had been purchased during the past years it was impossible to obtain data on seasonal variation that would include the production of all producers of market milk. The Cooperative Dairymen's League, however, has kept a record for a number of years of the number of pounds of milk produced monthly and the milk-fat test of members. A tabulation was made of the monthly production of milk and the milk-fat tests of eighteen members who shipped market milk continuously during the years 1928, 1929, and 1930. As the number of days in each month varies, the montly figures were reduced to a daily basis. The figures so obtained are shown in table 15. While the indexes of seasonal production of milk and milk fat must not be regarded as strictly accurate, they give a rough approximation of the seasonal variation of the eighteen producers whose records were used. It will be seen that there is not much variation in the index of seasonal variation of quantity of milk produced. The range is from 95.9 in December to 104.6 in April, a total variation of less than 9 points. However, there is a somewhat greater variation in the seasonal production of milk fat. The months of lowest milk-fat production (on basis of volume) are August and September, and the months of highest production January and February. The range between the months of highest and lowest production of milk fat is nearly 12 points. The reason for the differences in the indexes of milk and milk fat is that milk contains a larger percentage of milk fat during the late fall, winter, and early spring months than it does during the warmer summer months. As all market milk supplied to the East Bay cities is now purchased on a strictly milk-fat basis, the index of milk-fat production is the more significant of the two. It must be remembered that the figures in table 15 represent the production of only 18 shippers, who have produced market milk for several years. If data were available for all producers of market milk, including new producers and producers whose milk was purchased 38 University of California — Experiment Station "3 1 la 0) o - OOOOOsOsosOsOsosOO % H *"* ^ ** »H »H X > -« ositit>.50eNr^oeo»^coosa3 1 1 o OSOOOOOOOsOsososos a> S 73 hi «*OOtOCNO©©> ii 00t^-t>.«0»Ol0lO»COt^t--.00 00 CO CO CO CO CO CO CO CO CO CO CO CO _^ fc a o 0>NI001O«0001NH»N a | t« OONN"Ol9iaiOlO!OI-N» ■~ CO CO CO CO CO CO CO CO CO CO CO CO 1 v2 ^! OS NNHHWNOlOilflNOOO 00NN*(B CO CO CO CO CO CO CO CO CO CO CO CO ! > «! 00 NOHCJinooieooHcon OOOCN!OU)"C'l | iOiONN» CM o> «5 CO CO CO CO CO CO CO CO CO CO CO CO V a g>£ -Hict^ooeo^oioot^os'* oownHifliowOMHion OiO«00000-hOiCO a «rtNNOOifl»OOiOWl«l» J4 o ©3 ^3 HNNHrtHOOlOOl'oOC e ^ ^* ^ ^ ^ ^ ^ CO CO CO CO CO o a _o OO*-llCOC0«5OC0t^^00 OS i 2 as ^} ONlOClNlflM^MOCH o-H-> ■ rttON««NONNO>«!0 Q 3 OS OOCMtOCOO-HOSCNeOOsO^ HioOlNOOWeOOHSNrt *"1 CM.COCOCO^'-l'-'OSOSOSOSOS ^^t^'f'C^WWWMW A a & i I i o t 3 1 < > 1 i s *1 ' s 1 £ 1 c ' z c s 1 c z £ 1 Q a a ft I > "3 ~a . o o 2 "* "* >> ° s > Ti A J3 a o Is >> >> o o ^ T3 T3 s US 12 7° 7* ja 5 > > II oo "9 *8 o —I "* OS s a to 7. by co n col. n col £ *H 10 "J* "Z "1 c SjS 4:9 I S 1 8 8.&S3 3 t- "3 ■S -3 * * S a 3, 5, 6, verage verage ol. 4 m onthly onthly g N -^u^ > « -**"* 00 OS O »H Q •ce of da Cols Col. Col. Col. Col. Col. Bul. 534] An Analysis of the East Bay Milk Market 39 only for short periods each year, the seasonal variation would be somewhat greater than is shown in this table. It is interesting to note how uniform the monthly production of the 18 dairymen was over the three years. For instance, the average daily production for the month of January was 42,181 pounds in 1928, 40,000 pounds in 1929, and 41,061 pounds in 1930, a total variation of only about 5 per cent. For some of the other months the variation was a great deal less. TABLE 16 Indexes* or Seasonal Variation in Daily Average Production of Milk Fat in Market Milk Month East Bay milk shed (1928-1930) (18 shippers) Los Angeles milk shed (all shippers) (1925-1930) New York milk shed (1925-1929) 105 1 106.1 104.6 103 99.6 98.3 96.3 94.4 94 4 97.7 100.1 100 4 98 9 90.3 100 99 100 101 101 99 98 97 98 100 102 7 4 9 7 1 9 8 6 8 4 94.0 100 2 111 123 4 June 133.5 July ... 108.6 92 1 September 89.8 88.3 81.7 87.1 * Daily average production for period = 100; corrected for trend. Sources of data: Col. 1 from table 15. Cols. 2 and 3 from: Spencer, Leland. An economic survey of the Los Angeles milk market. California Agr. Exp. Sta. Bul. 513:101. table 56. 1931. Table 16 and figure 2 show the seasonal variation of production in the East Bay, Los Angeles, and New York milk sheds. It will be seen that the seasonal variation of production in the East Bay milk shed is somewhat greater than in the Los Angeles shed but the variation is not nearly so pronounced as it is in the New York shed. A comparison of seasonal variation of production and seasonal variation of consumption is shown in figure 3. Although consumption of market milk decreases during the summer months, production also decreases. It would seem that the largest surplus of production over consumption would tend to come in the winter months of December and January when consumption is low and production relatively high. The lowest surplus would probably come in September, the month of lowest production, and one of the months of highest consumption. 40 University of California — Experiment Station It is probable that even in September there would be some surplus ; for dairymen have to be prepared to supply at all times sufficient milk to meet an abnormally high demand due to such causes as exceptionally warm weather. Up to August, 1930, individual pro- ducers disposed of their own surplus; therefore it is not possible to determine more accurately to what extent production exceeded consumption during the different months of the year. Seasonal Variation - in Production of Milk Fat per Dairy in the East Bay", Los Angeles, and New York Milk Sheds JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT OCT. NOV. DEC. Fig. 2. — The seasonal variation in the production of milk fat in market milk in the East Bay milk shed (based on the records of 18 dairymen for years 1928- 1930) is somewhat greater than in the Los Angeles Milk shed (1925-1930) but not nearly so pronounced as in the New York milk shed (1925-1929). The heaviest production in the East Bay milk shed comes in the winter and early spring months, whereas in both the Los Angeles and the New York milk she^S it comes in the late spring or summer months. (Data from table 16.) ,j o Bul. 534] An Analysis of the East Bay Milk Market 41 Seasonal Variation in Production and Seasonal Variation in Distribution in the East Bay Milk Shed, 1928-1930 < ZIOO o < «0 x 90 - / PRODU CTION C^^ CONSUMPTION^ ^^ ^ • S N _ JUNE JULY SEPT. OCT. DEC. Fig. 3. — The peak of production of milk fat comes in the winter and early- spring months. Production is lowest during the months of July to October. Distribution is highest during the months of February, March, April, September, October, and November. The highest surplus of production comes in December and January and the lowest surplus in September and October. (Data from tables 7 and 15.) BUYING PRICES FOR MARKET MILK Buying prices of market milk (f. o. b. city plants) for the period January, 1926, to June, 1931, are shown in table 17 and figure 4 for the Oakland, San Francisco, Los Angeles, Seattle, and Twin Cities (Minneapolis and St. Paul) markets. It should be pointed out that market milk is purchased on different bases in different milk sheds. In some cities milk is bought on a milk-fat basis (so many cents per pound milk fat) ; in others on a basis of 100 pounds milk of a certain designated milk-fat test. Premiums are paid for each % pound of milk fat above the designated test and producers are penalized for each % pound of milk fat below the designated test. Milk has been purchased in Los Angeles on the former basis for several years ; in Oakland, however, milk was purchased on the latter basis until January, 1931, when a change was made to a milk-fat basis. As the average test of market milk pur- chased by distributors in Oakland was above the designated test, average prices paid during the period 1926 to 1931 actually were 42 University of California — Experiment Station table 17 Prices of Milk Fat in Market Milk in Cents per Pound Year and month 1926 January February... March April May June July August September. October November.. December.. 1927 January February... March April May June July August September. October November.. December.. 1928 January February... March April May June July August September. October November.. December.. 1929 January February... March April May June July August September. October November. December.. Price Oakland cents 81 81 79 79 79 79 78 80 79 78 78 79 81 83 83 83 83 84 84 84 84 86 San Francisco 89 89 Los Angeles 90 89 Seattle Bul. 534] An Analysis of the East Bay Milk Market 43 Table 17 — (Concluded) Price Year and month Oakland San Francisco Los Angeles Seattle Minneapolis- St. Paul / t S 4 5 1930 January February March April May June July August September October November December 1931 January February March April May June July August September October November December cents 86 86 86 86 82 82 84 84 84 60 57 57 67 74 74 74 74 74 72 70 70 70 70 70 cents 89 89 89 89 89 89 89 89 89 89 89 89 89 67 67 67 67 67 67 67 67 60 60 60 cents 90 90 90 88 88 86 80 80 80 80 80 80 72 72 70 70 70 70 70 70 65 65 65 65 cents 78 78 73 72 62 62 62 62 67 69 66 64 55 54 55 51 50 50 50 53 55 56 57 57 cents 74 70 67 67 67 67 67 67 67 67 67 61 57 53 53 53 53 53 53 53 54 54 54 49 Sources of data: Col. 1 : Prices for period January, 1926, to June, 1927, from records of two distributors in Oakland; prices July, 1927, to December, 1931, from: U. S. Dept. Agr. Bur. Agr. Econ. Monthly fluid milk report for the United States, monthly issues; and records of milk distributors. Cols. 2, 3, 4, and 5: U. S. Dept. Agr. Bur. Agr. Econ. Monthly fluid milk reports for the United States. (Note: Prices in reports are for 100 pounds of milk containing 3.5 per cent milk fat. These have been converted in above table to a price per pound milk fat by dividing prices quoted by 3.5. Where two or more prices are quoted, the highest price is shown.) somewhat above the prices shown in the Monthly Fluid Milk Reports for the United States. According: to information obtained from the records of distributors in Oakland for the period January, 1928, to April, 1930, it would appear that the average price paid to producers was about 86 cents per pound of milk fat. Relation Between Different Milk Markets. — The general level of prices of market milk varies considerably between different markets; such differences exist even in markets as closely related as those of Oakland and San Francisco. It will be seen that prices in both San Francisco and Los Angeles were consistently higher than those in Oakland (East Bay area) during the years 1926-1929. The prices in Oakland on the other hand were higher than those in Seattle and 44 University of California — Experiment Station Milk-Fat Prices in Different Milk Markets, 1926-1931 Fig. 4. — While in some milk markets buying prices fluctuate seasonally with the prices of butter, in other markets prices may remain unchanged for several years at a time. Since the beginning of 1930 the buying prices of market milk in San Francisco, Los Angeles, Seattle, and Minneapolis-St. Paul have declined more than the buying prices in Oakland. (Data from table 17.) Minneapolis and St. Paul (usually known as the Twin Cities) during the whole of the period 1926-1931. 19 The milk sheds of all population centers are more or less limited in extent and isolated from each other. High transportation costs in relation to the value of bulk milk give producers near to a popula- tion center an advantage over more distant producers. Moreover, milk, on account of its perishability, has to be handled with care and expedition. Hauling for long distances has to be done in specially constructed refrigerated cars or trucks. While milk is occasionally shipped from one milk shed to another (for example, from San Fran- cisco to Portland during the recent milk war in the latter city), this can be done only during an emergency. In normal times high transportation costs would make this unprofitable if a suitable supply were available nearer to the consuming center. It should be pointed !9 Prices in Minneapolis-St. Paul have been included in table 17 and figure 4 because market-milk prices in that market have for many years been kept in close adjustment with prices of manufacturing milk. Bul. 534] An Analysis of the East Bay Milk Market 45 out in this connection that owing to its greater value in proportion to its bulk, cream can be transported economically over much longer distances than market milk. While the East Bay market does not overlap with that of Los Angeles in regard to milk supplies, cream can be shipped from many points in the state with equal advantage to either of these markets. Another important factor limiting the area from which a popula- tion center can draw its supplies of milk is the requirements of city departments of health. As a. rule individual city health departments prescribe rules governing the condition of dairies which are permitted to ship market milk to their cities, All such dairies are usually required to be inspected by officials of the health departments. For a number of reasons city health departments are averse to granting permits to dairymen in distant producing areas if a plentiful supply of milk is available nearer to the cities. As a result of the comparative isolation of market-milk sheds, buying prices in the different markets are governed largely by local conditions. More rigid city sanitar3 r requirements in one area may be an important reason for higher buying prices in one area than in another where sanitary requirements are not so rigid. In other areas feed for cattle may have to be imported ; or an area for some reason or other may not be suitable for dairying. It would be neces- sary for dairymen in such areas to be paid higher prices than in areas where feed is more plentiful or dairy conditions more favorable. There is, however, one factor which serves to keep prices of market milk in different milk sheds somewhat in line, that is, the price of milk fat for manufacturing purposes. If an adequate supply of market milk is to be maintained, the prices paid to producers of market milk have to be over a period of time sufficiently higher than the prices paid for manufacturing milk to cover the higher cost of producing market milk. On the other hand, if the price of market milk is in excess of the additional cost of producing market milk there will be a tendency for new producers in the milk shed to start shipping market milk or for the area of the milk shed to widen. It must be pointed out, however, that in some milk sheds sanitary regulations or other means such as restriction of membership by a cooperative bargaining association, may be used for a time to limit the number of shippers or the area from which market milk is received. The differential between prices of market milk and manufacturing milk generally is narrower in an area where the volume of milk pro- duced is greatly in excess of the volume required for market-milk 46 University of California — Experiment Station purposes, than in an area where there is little or no excess of produc- tion over market-milk (and market-cream) requirements. For example, it is to be expected that prices of market milk in the San Diego milk shed, where the volume of milk produced is more closely ad- justed to the volume required for market-milk purposes, would be higher than prices in the East Bay, Seattle, and the Twin Cities milk sheds where the bulk of the milk fat produced goes into manufactured products, such as butter, cheese, and concentrated milk. However, the price of market milk in milk sheds such as that of San Diego cannot be kept too high arbitrarily for any length of time, else milk will be shipped in from adjacent territory. For example, Spencer pointed out that market milk would be shipped into Los Angeles from the San Joaquin Valley if the price in Los Angeles were high enough to cover the purchase price of suitable milk in the San Joaquin Valley plus transportation and other handling charges. Similarly, milk could be shipped into San Diego from the Imperial Valley if the price in San Diego were high enough to cover transportation and handling charges. Comparative Stability of Market-Milk Prices. — It will be seen from figure 4 that buying prices for market milk may remain unchanged for considerable periods of time, sometimes several years. The price of market milk in San Francisco was altered only once during the period 1926 to 1930. Prices in Los Angeles, Oakland, and the Twin Cities, while not quite as stable as those in San Francisco, nevertheless remained unchanged for a year or more at a time. In Seattle where market milk is purchased at a differential above wholesale butter quotations, the prices tend to vary monthly with prices of butter. It was stated above that there was some relation between prices of milk fat in market milk and milk fat in manufacturing milk. This does not imply, however, that market-milk prices should change with every change in prices of manufacturing milk. The relation may be between the annual average of prices for market milk and manu- facturing milk. Figure 4 shows that while the prices of market milk in Seattle, which were based on wholesale butter quotations, varied considerably seasonally, the annual average of prices during the years 1926 to 1929 was much the same. In most market-milk areas distributors are averse to frequent changes in retail prices. Experi- ence has shown that consumption is more stable if price changes are infrequent. Producers of market milk on the other hand are unwill- ing, as a rule, to accept lower prices if prices to consumers are un- changed. It is probable that if buying prices of market milk are Bul,. 534] An Analysis of the East Bay Milk Market 47 adjusted carefully to the annual level of prices of milk fat in manu- facturing milk, the returns to producers of market milk would be much the same regardless of whether prices were changed monthly or remained unchanged for a period of a year or more. While it may not be necessary to alter the buying prices of market milk with monthly changes in the prices of milk fat for manufacturing purposes, careful consideration should at all times be given to the future level of manufacturing-milk prices. If the tendency is for these prices to fall or rise to a new level, buying prices of market milk should be adjusted accordingly. Trend of Prices in Different Milk Markets. — The importance of giving careful consideration to the trend of prices of milk fat in manufacturing milk is illustrated by a study of prices of market milk for the five milk sheds since the end of 1929. It will be seen from figure 4 that prices of market milk in the Seattle and Twin Cities milk sheds fell rapidly during the first six months of 1930 and fell still further during the first six months of 1931. Prices in the Twin Cities market decreased from 80 cents per pound milk fat in November, 1929, to 53 cents in June, 1931, a total decline of about 34 per cent. Prices in the Seattle market declined from 78 cents per pound milk fat in December, 1929, to 47 cents in June, 1931, a decline of nearly 40 per cent. In both these markets an attempt is made to keep buying prices of market milk in close adjustment to prices of milk fat in manufacturing milk. It is significant to note that prices of butter, one of the main products manufactured from milk, started to decline towards the end of 1929. In the San Francisco area prices remained unchanged until Jan- uary, 1931, when a milk war broke out and prices dropped within a few weeks from 89 cents per pound milk fat to 67 cents and later as low as 60 cents, a decline of about 33 per cent. Prices per pound milk fat in Los Angeles dropped to 80 cents in July, 1930, and to 70 cents in March, 1931, a decline of 22 per cent. 20 In the East Bay area prices of market milk declined from 86 cents per pound of milk fat in April, 1930, to 82 cents in May and June. In July, prices were increased to 84 cents. In October, however, a milk war broke out and prices declined rapidly to below (?0 cents in November and December and the first part of January, 1931. At the conclusion of the milk war on January 17 producers and distributors were unable to agree upon the exact price to be paid for milk. Producers demanded 75 cents per pound of milk The price of market milk in Los Angeles has since declined still further. 48 University of California — Experiment Station fat, whereas distributors were not prepared to pay more than 73 cents. It was eventually decided that distributors should pay 75 cents for a period of six months. Producers were to receive only 73 cents, 2 cents being paid into an escrow fund, the final disposition of the fund to be decided upon by a committee consisting of two distributors, two producers, and a fifth member appointed by the four. It was anticipated that the information gained in the course of this investigation would be of assistance to the committee in decid- ing upon the final disposition of the fund. Following the preliminary report made to producers and distributors on July 1, 1931, the escrow committee met on several occasions. It was decided finally that 1 cent a pound of milk fat be returned to distributors and 1 cent a pound be paid to the League and to independent shippers. The buying price for market milk for the period January 17, 1931, to July 17, 1931, thus amounted to 74 cents. Prices thus declined from 86 cents in April, 1930, to 74 cents in June, 1931, a total decline of 12 cents, or just less than 14 per cent. Buying prices for market milk were decreased to 70 cents per pound of milk fat on July 17, 1931. This price was still being paid at the end of 1931. It will be seen that the percentage decline in prices in the East Bay milk-supply area was lower than for any of the other markets shown in table 17. While for several years the prices of market mill?: in Oakland were lower than in San Francisco and Los Angeles, prices during the months February to December, 1931, actually were several cents higher. Moreover, the differential of prices in Oakland over those in Seattle and the Twin Cities had increased considerably since the end of 1929. RELATION BETWEEN PRODUCTION AND PRICES Difficulty of Basing Market-Milk Prices on Costs of Production. — Although, as was pointed out above (page 27), the cost of producing market milk is greater than that of producing manufacturing milk, it is difficult to ascertain by any direct method just what this addi- tional cost is at any particular time. Cost-of-production analyses have been found to be of little assistance in determining either what is a "fair" price for milk for manufacturing purposes or what additional price is justified for market milk. It is impossible in this bulletin to analyze fully the reasons why costs of production are inadequate as a basis for determining the price of a commodity, but a few of the most important reasons are set forth below. Bul. 534] An Analysis of the East Bay Milk Market 49 In the first place there is a wide range in the costs of production of different producers. Just what costs could under the circumstances used as a basis for determining price? An average of all costs oulcl mean that all producers whose costs are above the average would either have to produce at a loss or discontinue producing. Several years ago it was thought that the problem of determining the true economic costs of production was solved by what came to be aown as the bulk-line-cost method. By this method it was thought it would be possible to determine the costs of the bulk of the pro- < r owever, it was found that the bulk-line cost was no more n the average cost. Another why costs of production cannot be used to deter- mine prices is aosts usually computed by accountants are not those which guic [ . oducer in deciding whether to produce or not. If a producer owns his farm the accountant in order to make his expenses comparable to those of producers who rent farms would include interest on investment as a cost of production. Yet a pro- ducer who owns a farm could continue producing indefinitely even if his returns were insufficient to provide him with interest on his investment or to cover depreciation on equipment. Most farmers would continue operating as long as the return from their farming operations were sufficient to cover cash expenditure for wages, taxes, fertilizer, family living expenses, etc. In some instances farmers may even borrow money on their property if returns are insufficient to meet current operating expenses. It is difficult, moreover, to evaluate some of the factors which influence individual producers in planning their farming operations. A cO'St-of -production analysis may indicate that a dairyman producing manufacturing milk could earn a higher net income if he produced market milk instead; yet he may not change. He may consider that the higher net return would not compensate him and his family for the extra time, care, and worry that would be necessary if he produced market milk. On the other hand, even if a dairyman found at any time that the returns he derived from the sale of market milk were inadequate to meet his costs of production, it may not be possible or advisable for him to make any radical change in his farming practices, other than to effect all possible economies in operation. This low net income may be due almost entirely to temporary low prices for market milk, such as would exist during a milk war or to temporary high prices for such cost items of production as cattle, feed, and labor. The soil, 50 University of California — Experiment Station climatic conditions, and situation of his farm may be much better suited to dairying- than to the production of other farm products. He may be an experienced dairyman but know little of other types of farming". He may not be able to secure the additional capital necessary to make the change. Finally, even if these difficulties did not exist, he may not make a change because he may consider that the prices of such other commodities as he could produce are so low or will be so low by the time he can have them ready for the market, or their costs of production are so high that he would derive an even lower net income or incur even greater losses if he changed from the production of market milk to the production of such alternative commodities. A third reason why costs of production cannot be used as a basis for price is that production costs of individual farmers vary consider- ably from year to year. A farmer's costs may be high this year and low the next. Moreover, many farmers are just getting started and their costs may be high ; the size of herds may be too small and losses may be incurred through inexperience. After a few years' experience and with larger herds, costs of production would be decreased. Furthermore, while it is essential that over a period of time the prices that individual farmers get for their products must be high enough to cover all production costs including cash expenditures, interest on investment, and depreciation or cost of replacement of equipment, the prices at any one time are determined primarily by conditions of supply and demand for those products and may have little or no relation to their costs of production. What consumers are prepared to pay for the quantity of a commodity offered at any time is of more importance in determining the price of that commodity than what it cost to produce it. 21 21 For more detailed information on the use of cost-of-production data as a basis for determining prices: Cox, A. B. Cost of production: its relation to price. Texas Agr. Exp. Sta. Cir. 26:11. 1920. Erdman, H. E. The marketing of whole milk. p. 191-200. The Macmillan Co., New York. 1921. Black, J. D. Elasticity of supply of farm products. Jour. Farm Econ. 6(2):145-155. 1924. Elliott, F. F. The nature and measurement of elasticity of supply of farm products. Jour. Farm Econ. 9 (3): 288-302. 1927. Garver, F. B., and A. H. Hansen. Principles of economics, p. 162-189. Gdnn & Co., Boston. 1928. Hibbard, B. H. Marketing agricultural products, p. 171-180. D. Appleton & Co., New York. 1921. Taylor, H. C. Outlines of agricultural economics, p. 487-501. The Mac- millan Co., New York. 1931. Bennett, M. K. The development and purposes of farm-cost investigation in the United States. Quar. Jour. Econ. 40:273-294. 1926. Bul. 534] An Analysis of the East Bay Milk Market 51 Differential Between Market-Milk and Manufacturing-Milk Prices. — If a cost-of -production analysis is inadequate to indicate what the differential in price of market milk over manufacturing" milk must be, is there any other means of determining even approximately what the differential in price should be ? This question is of vital importance to producers of both market milk and manufacturing milk. It is a well-known fact that all persons actuated by economic motives tend to invest their capital or to devote their labor to fields of production which over a period of time will provide them with the highest income on their investments or for their labor, mental and manual. For instance, dairymen who consider that they will find it more profitable over a period of time to produce market milk rather than manufacturing milk will devote their capital and labor to the production of market milk. If the price differential between market milk and manufacturing milk should widen, there would be a tendency for more dairymen to be attracted into the production of market milk. If the price differential should become narrower, producers of market milk tend to change to the production of manufacturing milk. In this connection it is interesting to note that dairymen, especially those producing manufacturing milk, seem to be influenced in making their decisions as to whether to produce manufacturing or market milk more by the established buying price for market milk than by the net average prices actually received by producers of market milk. The latter frequently do not receive anything like the established buying price. Deductions to cover losses incurred in disposing of the surplus cause the net buying price to be below the established buying price; how much below depends upon the percentage of surplus each producer of market milk has to bear at any time. With these facts in view it is important to ascertain what differ- entials existed during the past years between prices of milk fat in market milk and in milk for manufacturing purposes. Such infor- mation interpreted in the light of the number of dairymen producing market milk at different times will give some indication of how much more it cost to produce market milk than manufacturing milk. If at any time there was a tendency for producers of manufacturing milk to change to the production of market milk, it would be an indication that the differential existing at that time was greater than such dairy- men considered to be the additional cost of producing market milk. If, on the other hand, there was a tendency at any time for producers of market milk to change to the production of manufacturing milk, 52 University of California — Experiment Station it would lead to the conclusion that the differential was insufficient to cover those additional costs. It should be realized, however, that more rigid sanitary regulations or the insistence by distributors on a higher quality of milk may increase production costs, in which event a differential that previously may have been sufficient to cover the additional costs of production would no longer be sufficient. Similarly if certain factors have reduced the additional costs of production, the price differential may have to be decreased. Accurate data on farm prices of market milk and manufacturing milk in the East Bay milk shed unfortunately are available for only a year or two. It was possible, however, to obtain data for the period January, 1925, to December, 1931, on prices (on a milk-fat basis) paid by distributors for market milk delivered at plants in Oakland and also on prices paid by a creamery at Gustine for milk for manufac- turing into butter. Prices paid by the creamery at Gustine were used because it was not possible to obtain data from manufacturing plants within the East Bay milk shed for a sufficiently long period. It was found, however, that prices paid at Gustine during the past three years were practically equal to those paid by manufacturing plants in the East Bay milk shed. Prices for milk fat in Oakland and in Gustine, together with wholesale prices of butter at San Francisco, are shown in table 18 and figure 5 for the period January, 1925, to June, 1931. It should be made clear again that the prices shown in table 18 are those paid for milk delivered to plants in Oakland and to the creamery at Gustine. In order to obtain the farm prices of milk fat, deductions would have to be made for transportation and in the case of market milk for city inspection and for dues to the Cooperative Dairymen's League. Transportation costs at Gustine during the past year or two have averaged around 3 cents per pound of milk fat. Transportation costs for market milk vary to a certain extent in relation to the distance from Oakland. Moreover, transportation and other costs have not been constant during the whole of the period under review. For these reasons it was not found possible to arrive at net prices received by dairymen on the farm. Nevertheless, the prices shown in table 18 give a fairly accurate picture of the trend of milk-fat prices received by producers of market milk and manufacturing milk during the period under review. 22 22 If an agency undertakes in the future to collect information on supply and demand factors for market milk, it would be desirable to use farm prices instead of prices delivered to plants. If data on deductions for transportation, {footnote concluded at bottom of page 55) Bul, 534] An Analysis of the East Bay Milk Market 53 TABLE 18 Prices of Milk Fat at Gustine and Oakland and Wholesale Prices of Butter at San Francisco, January, 1925-June, 1931 Year and month 1925 January February March April May June July August September ... October November December Average. 1926 January February March April May June July August September... October November... December Average 1927 January February March April May June July August September... October November... December... Average 1928 January February March April May June July Market- milk prices at Oakland, cents per pound milk fat 77.7 77.6 74 3 78.8 74.2 74.3 73.5 74.8 76.4 78.4 80 4 80.0 76.6 80.9 81.0 79.3 78.8 79.0 81.0 83.0 83.0 83.0 83.0 84.0 84.0 84.0 84.0 86.0 86.0 86.0 84.0 86.0 86.0 86.0 86.0 86.0 86.0 86 Manufacturing- milk prices at Gustine, cents per pound milk fat 56.6 56.0 55.8 53 65 60 6 58.5 57.9 53.2 52.0 52 1 52.5 53.6 57.4 58.2 58.5 60.6 63.6 56.5 63.6 62 63.3 63.4 62.3 60 58.7 57.0 53.4 55 1 56.4 58.9 Wholesale prices of butter at San Fran- cisco, cents per pound 43.7 42.3 42.5 39.9 39.9 44.0 48.3 50.0 51.7 54.0 54 3 48.7 46.6 43.8 45.8 42.4 40 4 40.1 40 40 43 44 44 45 47.7 43.2 47.5 47.7 45 4 42.4 41.2 41.8 46.4 45.2 43.4 39.9 41.7 43 45.6 Differential between prices at Oakland and at Gustine, cents per pound milk fat 4 21.1 20.6 18.5 25.8 21.0 16.7 12 6 10 8 10 6 9 4 10 6 15 16.1 22.4 23.1 26.1 26.9 24.7 23.0 21.1 19.9 17.8 15.6 22.9 17.4 19.2 20.6 23.8 24.8 25.2 25.4 23.3 21.4 22.7 22.6 23.7 22.5 26 27.3 29.0 32 6 30 9 29.6 27.1 Three-monthly average differentials, cents per pound milk fat 20.1 21.2 11.7 23.9 26.9 22 17.8 19.1 24.6 23.4 23 27.4 31.0 54 University of California — Experiment Station Table 18 — ( Concluded) Year and month August September.... October November... December Average.. January February March April May June July August September... October November... December Average.. 1930 January February March April May June July August September.... October November December Average.. 1931 January February March April May June July August September... October November December Average.. Market-milk prices at Oakland, cents per pound milk fat 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 82.1 82.1 84.1 84.1 84.1 60.5 57.5 57.5 78.0 67.0 74 74.0 74.0 74.0 74.0 72.0 70.0 70.0 70.0 70.0 70.0 Manufacturing milk prices at Gustine, cents per pound milk fat 60.9 64.2 64.8 63.2 64.0 59.7 59.8 61.7 59.0 57.4 59.3 59.3 60.0 60.9 63.6 63.3 63.0 57.0 60.4 51.4 52.7 50.5 51.8 49.8 47.0 47.0 50.0 52.0 49.6 46.3 44.7 49.4 37.3 38.8 38.4 32.3 32.4 30.5 31.0 34.6 35.9 37.8 39.0 36.3 Wholesale prices of butter at San Fran- cisco, cents per pound 47.6 50.3 50.9 49.2 49.7 46.1 45.9 47.5 44.6 43.1 45.0 44.8 45 46.1 48.7 48.3 48 41.7 45.7 36.5 37.6 37.7 38.8 36.7 34.0 33.9 37.2 39.0 37.1 38.1 33.1 36 6 26.2 28.5 28 24 25. 2.5 26. 29. 30.5 31.9 32.0 29.7 Differential between prices at Oakland and at Gustine. cents per pound milk fat 25.1 21.8 21 2 22.8 22.0 26.3 26.2 24 3 27.0 28.6 26.7 26.7 26.0 25.1 22.4 22.7 23.0 29.0 25.6 34.6 33.3 36.5 34.2 32.3 35.1 37.1 34.1 32.1 10.9 11.2 12.8 28.6 29.7 35.2 35.6 41.7 41.6 43.5 41.0 35.4 34.1 32.2 31.0 33.7 37.0 Three-monthly average differentials, cents per pound milk fat 24.7 22 25.8 27 3 24 5 24 9 33.9 34.3 11.6 33.5 42.3 36 32.3 Sources of data: Col. 1: Prices, January, 1925, to December, 1925, from records of two distributors in Oakland; January, 1926, to December, 1931, from table 17. Col. 2: Prices from records of a creamery at Gustine. Col. 3: Prices from: Voorhies, Edwin C. Dairy products. California Agr. Exp. Sta. Bui. 514:92. table 48. 1931. Col. 4: Col. Hess col. 2. Bul. 534] An Analysis of the East Bay Milk Market 55 Prices of Milk Fat at Oakland and Gustine and Wholesale Prices of Butter at San Francisco, 1925-1931 100 Fig. 5. — Prices of milk fat at Gustine tend to follow closely the wholesale prices of butter at San Francisco. The absolute spread between these two series has become narrower since the beginning of 1930. While the prices of market milk at Oakland declined somewhat since January, 1930, the price decline has not been nearly so marked as the price decline for milk fat at Gustine. (Data from table 18.) It will be seen that the prices paid for milk fat at Gustine followed closely the wholesale prices of butter at San Francisco. The absolute differential or spread between the two series of prices, however, was much narrower during 1930 and 1931 than during previous years. This narrowing of the spread between the two price series was due partly to the decline in the value of the overrun or overchurn 23 and partly to the decrease in the prices of such by-products as casein, skim-milk powder, and buttermilk powder. While the prices of milk fat in manufacturing milk follow closely the seasonal changes in the wholesale prices of butter, the prices of (concluded from page 52) city health inspection, and Cooperative Dairymen's League dues are assembled each month it will be a comparatively easy matter to arrive at comparable farm prices. If such data are not collected currently it becomes almost impossible after a lapse of years to make the necessary adjustments. 23 One pound of milk fat makes, roughly, about 1% pounds of butter, the additional amount of butter made being referred to commonly as the ' ' overrun ' ' or "overchurn." Milk fat is purchased from producers usually at a premium over wholesale butter quotations, the amount of the premium being dependent partly upon the value of the overrun and partly upon the value of the by-products. The value of the overrun rises whenever the price of butter increases and falls whenever butter prices decline. 56 University of California — Experiment Station milk fat in market milk remain more or less unaffected by the seasonal changes of butter prices. In fact, as will be seen from figure 5, the price of market milk in the East Bay cities remained more or less unchanged for two or three years at a time. (See also figure 4.) It will be noticed, however, that while the wholesale prices of butter at San Francisco fluctuated seasonally, prices fell below 40 cents a pound and exceeded 50 cents a pound only once during the period 1926 to 1929. The annual average of wholesale butter prices during the four years fluctuated between 43 cents a pound and 46 cents a pound. Annual prices paid by the creamery at Gustine fluctuated around 60 cents per pound of milk fat during the four years. During the same four years the prices of milk fat in market milk were more or less constant around 86 cents a pound. Towards the end of 1929, however, wholesale prices of butter at San Francisco and prices paid for milk fat at Gustine declined rapidly ; the price at Gustine declined from about 63 cents in Septem- ber, 1929, to just over 51 cents in September, 1930, and to about 35 cents in June, 1931. Prices paid in Oakland for milk fat in market milk, however, remained unchanged until about April, 1930, and then declined only a few cents during the next five months. In October, 1930, however, the prices paid for market milk declined rapidly as a result of the milk war to below 60 cents. On the conclusion of the milk war, prices paid by distributors in the East Bay cities were increased to 74 cents. The spread or differential between prices of market milk at Oakland and manufacturing milk at Gustine (on a three-months' basis) is shown in figure 6 for the period January, 1925, to December, 1931. The unweighted average differential for each year is also shown in this figure. In 1925 prices of market milk in Oakland averaged 16.1 cents per pound of milk fat higher than those of manufacturing milk at Gustine. A substantial increase in the price of market milk in the years following 1925 resulted in increasing the annual differential to 22.7 cents in 1926, to 24.4 cents in 1927, and to 26.3 cents in 1928. In the following year (1929) the differential decreased slightly to 25.6 cents. The rapid decrease in the prices of manufacturing milk in 1930, while market-milk prices remained practically unchanged at 86.0 cents per pound of milk fat resulted in a marked increase in the differentials during the first nine months of the year. During the fourth quarter of 1930, however, the differential decreased to only 10.6 cents, largely as a result of the decline in market-milk prices during the milk war. But for this fact the annual average Bul. 534] An Analysis of the East Bay Milk Market 57 differential for 1930 would have been much greater than the 28.6 cents shown in figure 6. At the conclusion of the milk war on January 17, 1931, market-milk prices (to producers) were increased to 74 cents per pound of milk fat. While this represented a decrease of 12 cents from the prices prevailing in 1929 and the first few months of 1930, the prices of milk fat in manufacturing milk declined from about 60 cents during the last few months of 1929 to less than 40 cents during the first few months of 1931. The differential between market-milk and manufacturing-milk prices during the first two Differential Between the Prices of Market Milk at Oakland and Manufacturing Milk at Gustine, 1925-1931 1925 1926 1927 1928 1929 Fig. 6. — During the years 1926 to 1929 the differential between prices of milk fat at Oakland and Gustine fluctuated between 22.5 cents and 26.3 cents. In 1930, however, the differential increased to 28.6 cents and in 1931 to 37.0 cents per pound of milk fat. The heavy lines represent the average differential for each year and the bars the average differential by quarters. (Data from table 18.) quarters of 1931 was 33.5 cents and 42.3 cents per pound of milk fat respectively, which was considerably higher than at any previous period, except during the first nine months of 1931. In table 13 (page 35), it was shown that the number of dairy herds supplying market milk to the East Bay cities had decreased since 1928. Data on number of dairymen or number of herds for years previous to 1928 are not available. It is stated by officials of the Cooperative Dairymen's League and of the Oakland Health Depart- ment and distributors that the decrease in the number of dairymen since 1928 has not been due to the fact that the price differential over manufacturing milk was too low, but to the fact that in previous 58 University of California — Experiment Station years many dairymen who had permits did not ship any market milk to the East Bay cities. These dairies have gradually been eliminated so that the figures for 1931 reflect the number of dairymen who are active shippers. It was stated that during the years 1926 to 1929 there was not much movement of dairymen in and out of the market- milk business. The differentials in prices of market milk over manu- facturing milk appear to have been adequate; during these four years differentials varied between 22.5 cents (for 1927) and 26.3 cents (for 1928). If differentials varying from 22.5 to 26.3 cents per pound of milk fat a year were sufficient to maintain relative stability in the number of dairymen during the four years (1926-1929) it would appear that the differentials existing during the first nine months of 1930 and the first six months of 1931 were too high. Information gathered through interviews with dairymen in the East Bay milk shed and from other sources indicated that numerous producers of manufac- turing milk were anxious to obtain permits to ship market milk to the East Bay cities. One of the reasons given by such dairymen was that they were incurring severe losses in selling milk fat at the low prices prevailing during the first six months of 1931. In this connection it is interesting to note that as long as prices of manufacturing milk are favorable (i.e., are sufficiently high to result in a profit) many dairymen are content to produce manufactur- ing milk even if they could make greater profits by producing market milk; the higher profits would not be sufficient inducement to such dairymen to put forth the extra care and labor necessary for the pro- duction of market milk. "When, however, the prices of manufacturing milk fall so low as to result in severe losses, many of these dairymen are anxious to change to the production of market milk even if market-milk prices are not high enough to result in a profit, as long as they consider that they would incur smaller losses by producing market milk than by producing manufacturing milk. Such conditions were present during the first six months of 1931 and undoubtedly were largely responsible for the fact that so many dairymen who had previously produced manufacturing milk were anxious to obtain permits to ship market milk. There is only one way for producers of market milk to prevent other dairymen from coming into the market-milk business. That way is to keep the prices of market milk in such adjustment with prices of manufacturing milk that there will be no inducement for manufacturing milk producers to change. Obviously, a year is too Bul. 534] An Analysis of the East Bay Milk Market 59 long a time to wait before making adjustments in the prices of market milk. Many of the milk wars which broke out in different parts of the country in 1930 and 1931 probably could have been avoided if market-milk prices had been adjusted downward more rapidly. It was stated previously that it is impracticable to alter market- milk prices with every change in manufacturing milk prices. It would seem, however, that the adjustment of market-milk prices should be considered every three or four months. This does not necessarily mean that market-milk prices should be changed that frequently. A comparison of the differential existing between market-milk and manufacturing-milk prices during the same quarter of preceding years would indicate whether the differential for any three-monthly period has widened or narrowed. If it has widened a decision should be made as to whether the prices of market milk should be reduced. If the differential has narrowed an increase in price may be necessary. The differential between the prices of market and manufacturing milk is not the only factor that must be considered in setting the price of market milk. As was stated previously (page 21), if the per-capita consumption of market milk is decreasing, retail prices may have to be reduced in order to maintain consumption. 24 This may necessitate a reduction in prices to producers. The margins of distributors may, of course, have to be reduced at the same time. This matter will be referred to later on. Cost of Production Factors. — Another important factor that should be considered in setting prices to producers of market milk is the level of prices of some of the more important factors or elements of cost of production. While such cost data will not be the only basis for setting the price of a commodity such as market milk, a change in the level of some of the major cost items may have an important bearing on the volume of production and through production on price. Part of the returns obtained from the sale of milk fat is spent by dairymen for feed, labor, and other expenses of production If the price of some of these items declines, the purchasing power of milk fat in terms of these items increases, or put in another way, the same quantity of such items can be purchased with less milk fat. This increases dairymen's net money return (gross returns less expenses of production) ; an increase in net money returns nearly always leads to an increase of production and an increase in production to lower prices, unless, of course, consumption increases accordingly. 24 It is realized, of course, that consumption could be stimulated through advertising. During times of business depression, however, a reduction in retail prices would be the surest way to maintain per-capita consumption. 60 University of California — Experiment Station Spencer in his study of the Los Angeles milk market 25 found that in December, 1929, 1 pound of milk fat at the Los Angeles base price was equivalent in value to approximately 61 pounds of dairy feed at retail prices. In December, 1930, the ratio was 1 pound of milk fat to about 81 pounds of feed. He stated that since January, 1929, there was a relatively high degree of correlation between the purchas- ing power of milk fat in terms of dairy feed and the production of milk fat per dairy, indicating the importance of the changes in the costs of dairy feeds in price negotiations. TABLE 19 Relation - of Feed and Labor Costs to Total Cost of Producing Market Milk, 1922 Percentage of total gross costs of production Counties Feed Manual labor Feed and labor combined 53 3 45 5 47.2 42.0 20.4 22.5 24.1 22.3 73 7 Alameda, Contra Costa, Santa 68.0 71 3 64 3 Source of data: Adams, R. L. The cost of producing market milk and butterfat on 246 California dairies. California Agr. Exp. Sta. Bui. 372:140. table 25. 1923. In an analysis made in 1922 by Adams 26 it was found that feed and manual labor were two of the most important costs in producing market milk. The relation of feed and manual labor costs to total gross costs for counties in the East Bay milk shed are shown in table 19. These two items combined ranged from 64.3 per cent in San Joaquin and Stanislaus counties to 73.7 per cent in Marin and Sonoma counties. Feed costs alone accounted for from 42.0 to 53.5 per cent and manual labor costs from 20.4 to 24.1 per cent of total gross costs. It is stated by Adams that these two cost items still account for most of the cost of production of market milk. Feed costs in the Bay region vary considerably from year to year according to local weather conditions and production in various parts of the country. Dairy cattle can be run on the pasture for several months each year. During most of the year, however, barn feeding is 25 Spencer, Leland. An economic survey of the Los Angeles milk market. California Agr. Exp. Sta. Bui. 513:100. table 55. 1931. 26 Adams, K. L. The cost of producing market milk and butterfat on 246 California dairies. California Agr. Exp. Sta. Bui. 372:1-164. 1923. fiuL. 534] An Analysis of the East Bay Milk Market 61 necessary. Some dairymen produce a large part of the alfalfa hay fed to cattle ; others purchase most of their alfalfa-hay requirements. Practically all dairymen purchase concentrates to supplement the alfalfa hay and pasture feeding. In years of drought, pasture being poor and local production of alfalfa hay low, dairymen have to purchase a greater volume of feeds than in years of plentiful rainfall. An evaluation of dairymen's feed costs thus involves a consider- ation both of annual pasture and alfalfa-hay-production conditions in the East Bay milk shed and the prices of alfalfa hay and concentrates Wholesale Prices of Dairy Feed at San Francisco, January, 1926-May, 1931 30 25 15 . 1 1 ■ 1 1 1 1 1 , T . .' i ■ i ii i i n 1 1 i 1 1 1 i i i i Ti i i i rr i i i i i 1 1 1 ~t 777777" , , 1 1926 Fig. 7. — The trend of composite feed prices including alfalfa and concentrates was upward during the period January, 1926, to April, 1929. Prices, however, declined rapidly from a high point of nearly $30 a ton in April, 1930, to about $16.50 a ton in May, 1931. (Data from table 20.) on the open market. If production conditions in other parts of the United States have been unfavorable, such feeds will be high in price. In figure 7 are shown composite wholesale feed prices in San Fran- cisco for the period January, 1926, to May, 1931. It will be seen that feed prices increased from less than $20 a ton in October, 1926, to nearly $32 a ton in April, 1929. Since that month prices declined almost continuously and in May, 1931, composite feed prices were about $16.50 a ton. (See table 20. ) During the above period market-milk prices fluctuated as well. It is thus interesting to ascertain what the relation was between feed prices and market-milk prices. Unfortunately, farm prices of market milk and retail prices of feeds are not available for the whole of the 62 University of California — Experiment Station TABLE 20 Number of Pounds of Dairy Feed Purchasable with One Pound of Milk Fat, January, 1926-May, 1931 Year and month 1926 January February March April May June July August September... October November... December Average 1927 January February March April May June July August September... October November... December Average 1928 January February March April May June July August September... October November... December Average 1929 January February March April May Buying price of market milk at Oakland mts per pound milk fat 80.9 81.0 79.3 78.8 79.0 79.4 78.3 80.4 79.3 78.4 78.4 79.2 79.4 81.0 83.0 83.0 83.0 83.0 84.0 84.0 84.0 84.0 86.0 86.0 86.0 84.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86.0 86 86 86.0 86.0 86.0 86.0 86.0 86.0 Wholesale price of dairy feed at San Francisco dollars per ton 23.19 23.10 22.85 22.48 22.39 21.48 22.22 20.12 19.81 20.56 20.82 21.23 21.69 21.18 21.20 21.15 20.42 20.79 20.33 21.69 21.51 22.72 23.08 24.28 24.98 21.94 25.15 26.00 26.97 26.53 25.95 25.60 25.44 22.98 22.69 22.45 24.11 26.60 25 04 27.80 28.56 29.98 31.81 31.54 cents per pound 1.16 1.16 1.15 1.12 1.12 1.07 1.11 1.01 0.99 1.03 1.04 1.06 1.08 1.06 1.06 1.06 1.02 1.04 1.02 1.08 1.08 1.14 1.15 1 21 1 25 1.10 1.26 1 30 1.35 1.33 1 30 1.28 1.27 1.15 1.13 1.12 1.21 1 33 1.25 1.39 1.43 1.50 1.59 1.58 Number of pounds of feed purchasable with one pound milk fat (on wholesale basis) 4_ pounds 69.6 70.4 70.5 74.2 70 5 79.6 80.1 76.1 75.4 74.7 73.5 76.4 78.3 78.3 81.4 79.8 82.4 77.8 77.8 73.7 74.8 71.1 68.8 76.4 68 3 66.2 63.7 64.7 66.2 67.2 67.7 74.8 76.1 76.8 71.1 64.7 61.9 60.1 57.3 54.1 54.4 Bul. 534] An Analysis of the East Bay Milk Market 63 Table 20 — (Concluded) Year and month Buying price of market milk at Oakland Wholesale price of dairy feed at San Francisco Number of pounds of feed purchasable with one pound milk fat (on wholesale 1929 June July August September... October November... December Average 1930 January February March April May June July August September... October November... December Average 1931 January February March April May cents per pound milk fat 86.0 dollars per ton 30.33 26.60 23.43 23.80 23.99 24.65 25.20 27.31 25 31 25.09 24.45 23.47 22.47 19.94 17 92 18.92 18.89 18.21 18.17 20.06 21.08 20.14 19.05 17.64 17.12 16.50 cents per pound 1.52 1 33 1.17 1.19 1.20 1 23 1.26 1 37 1.27 1.25 1.22 1.17 1.12 pounds 1.10 95 0.88 0.86 0.83 Sources of data: Col. 1 from table 17. Cols. 2 and 3 from data on wholesale prices of feed in San Francisco compiled by the Agricultural Extension Division of the University of California. In computing the composite feed prices the following weights were used: Alfalfa, 45: cracked corn, 1; ground barley, 4; rolled oats, 1; cottonseed meal, 2; bran, 3 ; sugar-beet pulp, 2; linseed meal, 2. Col. 4: Col. 1 divided by col. 3. above period. In figure 8, however, are shown the number of pounds of dairy feed purchasable at wholesale prices in San Francisco by 1 pound of milk fat in market milk (f. o. b. distributors' plants). The data, while not truly representative of farm purchasing- power of milk fat in market milk in terms of dairy feeds, give a fairly accurate picture of the level of purchasing power at different times. It will be seen that the number of pounds of dairy feed purchasable by a pound of milk fat varied considerably throughout the period covered. In April and May, 1929, when feed prices were very high, only about 64 University of California — Experiment Station 54 pounds of feed could be purchased with 1 pound of milk fat. From then until October, 1930, feed prices decreased, whereas market- milk prices remained practically unchanged. With the outbreak of the milk war in the East Bay cities in October, 1930, prices of market milk dropped precipitately, whereas feed prices remained more or less unaltered. In consequence the number of pounds of feed that could be purchased with 1 pound of milk fat decreased to about 57 Pounds of Dairy Feed Purchasable with One Pound of Milk Fat in Market Milk, January, 1926-May, 1931 90 / / 80 / / / / §70 o a J 60 v i 50 1926 1927 1928 1929 1930 1931 Fig. 8. — The number of pounds of dairy feed purchasable with one pound of milk fat in market milk increased rapidly since April, 1929, except during the period of the milk war (October, 1930-January, 1931) when the quantity pur- chasable fell rapidly as a result of the decrease in prices of market milk. (Data from table 20.) in December, 1930. During the first five months of 1931 the amount of feed that could be purchased with 1 pound of milk fat increased rapidly and in May reached 89 pounds. This increase from Decem- ber, 1930, was due mainly to the increase in prices of market milk to 74 cents per pound of milk fat, although feed prices also declined somewhat. » It is difficult to obtain any quantitative measure of labor costs at different times. Table 21 gives the wages of milkers in California by years for the period 1926-1930 and for the first five months of 1931. Bul, 534] An Analysis of the East Bay Milk Market 65 It will be seen that the average wage of milkers has decreased steadily from $90 in 1926 to $65 in May, 1931, a decrease of nearly 28 per cent. These figures, however, do not give a good indication of the trend of manual labor costs. Most dairymen supply their milkers with board and room in addition to the money wage. Retail prices of food- stuffs vary from time to time. During the first few months of 1931 food prices were considerably lower than they were in 1929 and previous years. Some dairymen undoubtedly have effected certain economies by decreasing the quality or variety of food supplied TABLE 21 Monthly Wages of Milkers in California* Year Low High Average 1926 dollars 80 00 75.00 75.00 75.00 70 00 60.00 60 00 50 00 50.00 50.00 dollars 100 00 95 00 90.00 90 00 90.00 80 00 80 00 80.00 80 00 80.00 dollars 90.00 1927 82 50 1928 82 50 1929 82.50 1930 80 00 1931 70 00 70.00 65.00 65.00 65.00 * Board and room are in addition to above wages. Source of data: Voorhies, Edwin C. Dairy products. California Agr. Exp. Sta. Bul. 514:129. table 68. 1931. manual laborers. It is also known that during the year 1930 and the first few months of 1931 various changes were effected whereby the output of work per laborer was increased. These plans varied all the way from wages based on piecework to longer working hours. A reliable picture of the trend of manual-labor costs could be obtained if expenditures for wages and food were collected from a number of representative dairymen. Time, however, did not permit such infor- mation to be obtained. Nevertheless, the data in table 21 indicate that manual-labor costs have decreased considerably since 1929. It took approximately 113 pounds of milk fat to pay the monthly wages of a milker in 1926, 93 pounds in 1929, and 89 pounds in May. 1931. While the price of milk fat in market milk decreased from 86 cents in 1929 to 74 cents in May, 1931, the decrease in the two main cost items was relatively greater. A pound of milk fat in May, 1931, would pay for more feed and more labor than at any time since 1926 66 University of California — Experiment Station with the exception of about three months in 1930. In view of these facts it seems reasonable to expect that dairymen would tend to increase their production of market milk either by feeding 1 their dairy cattle more heavily or by keeping more cows. As the total volume of consumption of market milk has shown a tendency to decrease during recent years, an increase of production would only mean that a larger proportion of milk produced by dairymen shipping market milk to the East Bay cities would have to be diverted into manufacturing channels. If such an increase of production of market milk is to be avoided, it would seem that buying prices of market milk must be reduced. That such a reduction may be advisable is indi- cated also by the fact that the differential between market-milk and manufacturing-milk prices had increased to such an extent in May, 1931, as to make it attractive for dairymen producing milk for manufacturing purpose to change to the production of market milk. Effect of Surplus Production of Market Milk. — The diversion of a large proportion of market milk into manufacturing channels is undesirable both from the viewpoint of producers of market milk and of producers of manufacturing milk. There are no accurate data available as to the volume of surplus market milk produced prior to August, 1930. Since this date, how- ever, the Cooperative Dairymen's League has kept a record of milk produced by market-milk dairymen and of all milk disposed of to distributors in the East Bay cities and through other outlets. Such data together with amounts credited to producers and proceeds of sales of milk are shown in table 22 for the first six months of 1931. It will be seen that members of the League and nonmembers produced over 2.056,000 pounds of milk fat during the period under review, the production of League members representing about 77 per cent of the total. Nearly all dairymen are allotted a daily quota on which thev are credited with the full buying price of market milk. Each dairyman's quota is based on his average daily production for the months of September to December of each year. Members and non- members were credited with the full buying price of market milk (74 cents per pound of milk fat) on 1,869,100 pounds of milk fat. The difference between this amount and the total amount of milk produced, namely 187,000 pounds of milk fat, represented producers' surolus, or milk produced by individual dairymen in excess of their dailv quota. The League, however, was unable to sell all the quota milk to distributors in the East Bay cities. The total volume of milk fat Bul. 534] An Analysis of the East Bay Milk Market 67 TABLE 22 Pounds of Milk Fat in Market Milk Produced and Sold in the East Bay Milk Shed, January- June, 1931 Milk produced Pounds of milk fat Credit to producers Jan. Feb. March April May June Total Total, in dollars Price per pound of milk fat, cents Total production: 244,100 95,600 339,700 232,500 91,400 323,900 11,600 4,200 15,800 237,200 85,900 323,100 218,900 78,100 297,000 18,300 7,800 26,100 266,700 86,700 353,400 235,500 75,400 310,900 31,200 11,300 42,500 261,200 73,300 334,500 231,500 65,400 296,900 29,700 7,900 37,600 288,700 55,700 344,400 262,100 45,800 307,900 26,600 9,900 36,500 283,200 77,800 361,000 265,300 67,200 332,500 17,900 10,600 28,500 1,581,100 475,000 2,056,100 1,445,800 423,300 1,869,100 135,300 51,700 187,000 Total Quota milk:* 1,070,000 313,000 1,383,000 50,100 19,100 69,200 74 74 Total 74 Producers' surplus:! 37 37 Total 37 Milk sold Pounds of milk fat Proceeds of sales Jan. Feb. March April May June Total Total, in dollars Price per pound of milk fat, cents Quota milk Market milk to East Bay distributors: Members Nonmembers Total League's surplus^ To other milk markets To manufacturing plants Total Total sales of quota milkl Producers' surplus to manu- facturing plants: Members Nonmembers Total 190,600 91,400 282,000 26,000 15,900 41,900 323,900 11,600 4,200 15,800 162,900 78,100 241,000 34,800 21,200 56,000 297,000 18,300 7,800 26,100 183,800 75,400 259,200 22,200 29,500 51,700 310,900 31,200 11,300 42,500 188,200 65,400 253,600 27,200 16,100 43,300 296,900 29,700 7,900 37,600 200,800 45,800 246,600 26,900 34,400 61,300 307,900 26,600 9,900 36,500 183,800 67,200 251,000 34,000 47,500 81,500 332,500 17,900 10,600 28,500 1,110,100 423,300 1,533,400 171,100 164,600 335,700 1,869,100 135,300 51,700 187,000 821,500 313,200 1,134,700 90,700 61,500 152,200 1,286,900 50,100 19,100 69,200 74 74 74 53 37 46 69 37 37 37 * Quota milk = quantity of milk on which producers were credited with full basic buying price. t Producers' surplus = quantity of milk produced in excess of quota milk. t League milk = quantity of quota milk in excess of sales to East Bay distributors as market milk. 1 Loss on sales of quota milk = credits to producers on quota milk less proceeds of sales. Source of data: Records of the Cooperative Dairymen's League. 68 University of California — Experiment Station in market milk disposed of to these distributors was 1,533,400 pounds. The difference between this amount and the volume of milk fat (namely 335,700 pounds) for which dairymen were credited with the full buying" price for market milk represented the League's surplus. The combined surplus (League and producers') of milk fat in milk produced in excess of what was sold to distributors in the East Bay cities was 522,700 pounds, This amounted to approximately 25 per cent of all milk fat produced by market-milk dairymen. Of the League's surplus, 171,100 pounds was sold to distributors in other milk markets and 164,600 to manufacturing plants. All the producers' surplus, 187,000 pounds, was also sold to manufacturing plants. Members and nonmembers were credited with about $1,383,000 for milk delivered under their quota and with $69,200 for milk pro- duced in excess of the quota, The latter figure represents the gross proceeds of sales of producers' surplus milk to manufacturing plants. The 1,533,400 pounds of milk fat sold to East Bay distributors realized about $1,134,700 ; sales of quota milk to other milk markets and to manufacturing plants realized $90,700 and $61,500 respectively, or 53 cents and 37 cents per pound of milk fat. The gross loss on sales of quota milk delivered by members and nonmembers was about $96,000. A deduction or levy of % cent a gallon was made on all quota milk delivered by members and nonmembers. In the case of non- members the deductions were made by distributors and paid over monthly to the League. It was anticipated that the funds so accumu- lated plus certain savings on freight which would accrue to the League would be sufficient to meet all operating costs and any losses which might be incurred in disposing of surplus quota milk. Early in April, 1931, however, it was found that the deduction of % cent a gallon on all quota milk was insufficient to meet operating costs and losses on surplus. The Board of Directors of the League, therefore, decided to deduct from the amounts due members monthly, sufficient amounts to cover the deficit. In May the additional deductions made from members amounted to about 2% cents per pound of milk fat. In June, 1931, the regular deduction from members and nonmembers alike was increased to 1 cent a gallon. The sale of such a large proportion of market milk to manufactur- ing plants thus involves considerable loss to the producers of market milk. A reduction in the price of market milk to producers and to consumers would have the effect of increasing or at least arresting the decrease of per-capita consumption, of checking an increase of Bul. 534] An Analysis of the East Bay Milk Market 69 production, and of reducing the spread between the prices paid by the League on quota milk and the prices received by the League on surplus quota milk. It would seem that dairymen would stand to gain more in the long run by selling a larger proportion of market milk produced to distributors at a somewhat lower basic price than by selling a continuously decreasing quantity to distributors at a high price and an increasing proportion of the milk produced to manufac- turing plants at a, considerably lower price. As will be pointed out later on, a decreasing volume of milk handled by distributors tends to increase unit costs and thus, margins remaining the same, to reduce net profits. This will result in the demand by distributors for a higher margin. Not only is the diversion of a large proportion of market milk into manufacturing channels contrary to the best interests of pro- ducers of market milk, but it tends to depress the prices received by manufacturing-milk producers. During the first few months of 1931 there appeared to be an overproduction of butter and other dairy products. As a result prices for manufacturing milk declined rapidly. Many producers of manufacturing milk in California and other parts of the United States complained that, the diversion of increasing quantities of market milk into manufacturing channels was largely responsible for the apparent overproduction. They asserted with some justification that the high prices paid to producers of market milk and the high prices paid by consumers in many milk sheds resulted not only in an increase of production of market milk but also in a decrease of per-capita and total consumption of market milk. It was felt that a reduction of buying prices to producers and of retail prices to consumers would decrease production of market milk, would increase consumption, and would relieve the manufacturing- milk market of a flood of surplus market milk. It is interesting to note that towards the end of 1931 buying prices of market milk were reduced considerably in many of the large eastern milk sheds. Price Regulation on the Basis of a Formula. — It is believed by many of those in the market-milk industry that prices paid to dairy- men can be regulated on the basis of some formula, which would involve the automatic adjustment of market-milk prices in accordance with changes in the factors entering into the formula. Those advo- cating the use of a formula plan point out that even if buying prices are established by means of collective bargaining, producers and distributors often have extreme difficulty in agreeing upon them. The establishment of prices in accordance with a mathematical formula 70 University of California — Experiment Station would remove this difficulty and eliminate a great deal of friction between the two groups. The main purpose of all the formula plans suggested is to regulate prices to producers so as to ensure at all times an adequate volume of market milk. While numerous formulas for the establishment of market-milk prices have been suggested from time to time, most of the plans can be grouped in two classes. In the first group of plans prices of market milk would be regulated in accordance with changes in the prices of such items as feed and labor which enter into the cost of producing market milk. All of these plans are based on the assump- tion that the buying prices of fluid milk should be equal to the costs of production. It is assumed, furthermore, that the relative quantities of the different items going to make up the total feed and other costs of milk production remain more or less constant in a given district, only the price of the different items changing from time to time. The relative quantities of the various constant cost items would be ascertained from cost-of -production studies in each milk shed. When once the relative quantities have been established prices of milk would be changed in accordance with changes in the price of these constant cost items. The second group of plans aims at regulating prices of market milk in accordance with changes of such regularly quoted dairy prod- ucts as butter and cheese. It is pointed out by those favoring such a plan that manufacturing milk is purchased as a rule at a premium over butter or cheese prices in some central market and that as market milk is essentially a higher grade of manufacturing milk it should be purchased on a similar basis, except that owing to higher costs of production the premium over butter prices would be somewhat higher than in the case of manufacturing milk. 27 The regulation of market-milk prices on the basis of some formula has been attempted in various markets in the United States, but none of these formula plans have been found satisfactory. In the first place the relative quantities of the various items entering into the cost of producing market milk do not remain constant, A change in the prices of any of these factors will cause more or less of them to be used. Other changes may occur at the same time costs are changing, thus making other types of farming so much more profitable that 27 For a more detailed discussion of the formula method see: Erdman, H. E. The marketing of whole milk. p. 188-212. The Macmillan Co., New York. King, Clyde L. The price of milk. p. 108-129 and 159-165. The John C. Winston Co., Philadelphia. 1920. Bul. 534] An Analysis of the East Bay Milk Market 71 market-milk producers would not be satisfied with, the same rate of profit as prevailed during the base period. The prices of manufac- turing milk are regulated by world conditions, whereas the prices of market milk are influenced to a considerable extent by conditions of a local nature. Producers who have gone to the expense of equipping their dairies to produce market milk, are unwilling to accept lower prices for their milk because world conditions may have caused a temporary decline in the prices of manufactured dairy products. They maintain that if they are to produce a regular flow of milk they must have the assurance of more regular prices, which would not be pos- sible if market-milk prices are changed with the frequent changes in prices of butter and cheese. It should be pointed out, furthermore, that most formula plans fail to give adequate consideration to the reaction of consumers to prices. The mere lowering or raising of prices to producers will not ensure that the volume of milk forthcom- ing at those prices will be consumed. Producers, moreover, are opposed to accepting reductions in buying prices unless retail prices are reduced accordingly. Bujdng prices of market milk thus are related closely to retail prices and distributors' margins. If stability is to be maintained in the dairy industry, considera- tion must be given, in establishing buying prices of market milk, to the interrelation of all the factors influencing the production of and the demand for market milk. This would involve a consideration of the trend in per-capita consumption as related to retail prices, the trend in distributive capacity, distributors' margins, and cost of dis- tribution, the trends in production and prices of market milk and manufacturing milk, and the prices of the elements entering into the cost of producing market milk. As the relative importance of the various factors may change from time to time, it has been found im- practicable to reduce them to a mathematical formula on which to base buying prices of market milk. The interrelations between the factors that influence prices of market milk are so complicated and change so frequently that it is extremely unlikely that any ready method can be found for arriving satisfactorily at market-milk prices at any given time by any sort of formula. 72 University of California — Experiment Station TRANSPORTATION OF MARKET MILK FROM DAIRIES TO CITY PLANTS Market milk for the East Bay cities is obtained from as far south as Salinas, from as far east as Stockton and Manteca, and as far north as Woodland. All of these points are more than 80 miles from Oakland, where most of the distributing" plants are located. It is estimated that approximately two-thirds of the milk is obtained from dairies situated 50 miles or more from the center of Oakland. The importance of an efficient and economic system for collecting market milk in the country and hauling it to distributing plants in the cities thus cannot be overemphasized. It has been the practice for a number of years to pay for market milk f.o.b. city plants, the producer defraying the cost of transporta- tion to such plants. A few dairymen located near to one or other of the East Bay cities transport their own milk to plants. Most dairy- men, however, find that they have not the time nor the facilities to undertake this task. Moreover, distributors generally desire to super- vise the hauling of milk themselves in order to ensure that it will arrive at the plants in good condition. Until a few years ago the collection and hauling of milk was performed by private trucking companies under contract with the various distributors. The hauling charges usually were deducted by the distributors from the payments due each dairyman and paid over to the trucking companies. As a result of dissatisfaction with the quality of service rendered by the private trucking companies, most of the distributing firms gradually undertook to haul their milk supplies in their own trucks. The chief causes for complaint against the privately owned trucks were that they frequently did not arrive at the plants on the sched- uled time and that proper care was not taken of the milk. Some of the trucking companies used poor trucks which frequently broke down in the country. The delay in the arrival of milk at the plants often caused serious inconvenience and loss. Another reason given by some of the distributors for undertaking the hauling of milk was that they were able to establish better contact with patrons through their own truck drivers. In June, 1931, practically all the milk arriving in the East Bay cities was being hauled in trucks belonging to the various distributing firms. One or two distributors, however, were still contracting with Bul. 534] An Analysis of the East Bay Milk Market 73 private truck drivers, or with other distributors, for the hauling" of part of their milk supplies. Each distributing firm aims to make its trucks appear as clean and attractive as possible ; the firm 's name is usually prominently displayed. It is claimed that an attractive truck with a firm's name constitutes one of the best methods of advertising. A few of the larger firms use refrigerator tank trucks. Milk usually arrives at the plants during the night or in the forenoon. Some firms receive milk twice a day. The basis on which milk is hauled from country points to the various distributing plants in the East Bay cities is set forth in uni- form contracts dated January 17, 1931, between the Cooperative Dairymen's League and individual distributors. It is provided that delivery of milk shall be made in conformity with the requirements, time schedules, and operating methods of the distributor. Individual dairymen are required to have their milk in cans either at the ranch or at a platform near the farm on a passable and accessible road. The distributor has the right to arrange the time at which milk will be collected from the farms or platforms of dairymen. Transportation Charges. — Nothing is stated in the contract as to transportation charges from the various country points but it is understood that these shall not be greater than the prevailing rates of independent haulers. The distance of the various pick-up points from Oakland and the charges made by distributors are shown in table 23 and figure 9. The charges vary from as low as 13 cents per 10-gallon tank for milk coming from the vicinity of San Lorenzo, to 35 cents per 10-gallon tank for milk coming from the vicinity of Salinas in the south and Woodland in the north. It is stated that the transportation charges of the distributors have remained practically unchanged for several years. The cost of operating trucks, however, has decreased considerably during the past few years. The wholesale price index of automobiles (f.o.b. plant) decreased from 111.6 in January, 1929, to 95.2 in December, 1931, and the wholesale price index of tires from 58.1 in January, 1929, to 40.8 in December, 1931. 28 The wholesale and retail prices of gasoline and oil in the Bay region have also been decreased considerably. Dur- ing 1929 the prevailing retail price of the standard brands of gasoline was 21 cents a gallon in Oakland. During the first few months of 1931 as a result of a "gas war" retail prices fell below 10 cents a gallon. They have since been stabilized at 16.5 cents a gallon. These 28 Data from U. S. Dept. Labor Bur. of Labor Statistics. Wholesale Prices of Commodities. Issues for months of January, 1929, and December, 1931. 74 University of California — Experiment Station reductions in the cost of operating trucks have not been passed on to the producer in the form of lower transportation charges or to the consumer in the form of lower retail prices. TABLE 23 Volume of Milk Hauled and Transportation Eates from Various Country Points to Oakland, June, 1931 Nearest town South San Leandro San Lorenzo Hayward Alvarado Decoto Centerville Mission San Jose. Irvington Newark Milpitas San Jose Gilroy Salinas East Walnut Creek Pleasanton Bethany Tracy Banta Byron Vernalis Brentwood Lathrop Oakley Knightson Manteca French Camp Stockton North San Pablo Pinole Vallejo Napa Shellville Yountville Sonoma Oakville Elmira Dixon Woodland Sacramento Number of dairies Number of 10-gallon cans 19 23 74 38 15 18 131.8 230 5 21.7 100.7 277.6 25.3 15.7 191 5 22 5 628.6 252 6 114 25 72. 31 45 23 83 28. 341. 63. 71. 21. 14. 25. 27. 7. 22. 11.6 165.1 14.5 59.9 Code No.* of distributors hauling 4,5 1,3 3 3 3 3 4 2,7, 1,1 4,3,1 2 7,2,1 2, 12 3 5 4,8, 1 10 11,4,10,3,1,9,2 11, 2, 10, 1 1,2 1 2 10 1.2 1 1,8 10 3,9, 1,2,8 7,6 1.2 2 1,7 1 1 1,2 2 1 Approximate distance miles 10 12 14 22 20 25 32 30 30 36 44 72 100 21 30 30 47 55 56 58 59 55 62 78 100 Rate per 10-gallon can cents 12 13 14 15 15 17 18 18 18 19 20 30 35 * Each distributor is represented by a code number and not by name. Source of data: Records of individual distributors and of the Cooperative Dairymen's League. Bul, 534] An Analysis of the East Bay Milk Market 75 During the course of this study detailed operating' statements covering a period of several months or a year were obtained from all distributing firms in Oakland, Berkeley, and San Leandro. An attempt was made to ascertain from these statements how much it Transportation Kates for Market Milk erom Various Country Points to Oakland Fig. 9. — In June, 1931, market milk was obtained from as far south as Salinas, Monterey County; from as far east as Manteca, San Joaquin County, and as far north as Woodland, Yolo County. Transportation rates per 10 -gallon can varied from 35 cents for milk obtained from Salinas and Woodland to as low as 14 cents for milk received from San Lorenzo, Alameda County. (Data from table 24.) 76 University of California — Experiment Station cost distributors each month to transport their milk supplies from country points to their city plants and what revenue they derived from charges for transportation. Unfortunately most of the dis- tributors did not segregate their truck expenses between country hauling and city delivery. A few distributors, however, did make such a segregation. The data supplied by these few distributors showed clearly that they made a considerable net profit (total deduc- tions from dairymen less operating costs, depreciation, and interest on investment) monthly from hauling. While a few of the other dis- tributors claimed that they were not making any profit on hauling or that they were actually losing money, most of them admitted that they were deriving a net profit from hauling. In this connection it must be remembered that distributors also derive an indirect advantage through using their trucks as an advertising medium. Quite apart from the question of whether or not distributors are making a profit on hauling milk, the transportation arrangements in force at the time this study was made appear to be most uneconomical and therefore a considerable burden on the East Bay market-milk industry (distributors and dairymen alike). It will be seen from table 23 that two distributors (code Nos. 2 and 12) collect milk from the vicinity of Gilroy and three (Nos. 1, 2, and 7) from San Jose. Thus no less than four distributors haul milk from San Jose and points south. Eight distributors (Nos. 1, 2, 3, 4, 8, 9, 10, 11) collect milk from Tracy and points east of there. Two trucks haul milk from Dixon and Woodland. The load is barely sufficient for one truck. On many of the roads the loads of two or three distributors' trucks could very easily be combined to make a load for one good-sized truck. It is stated that about thirty trucks altogether are used for hauling milk into the East Bay cities. The directors of the Cooperative Dairymen's League and most of the dairymen visited during the course of this study expressed them- selves as being most dissatisfied with the hauling charges, which they consider too high in view of the decrease in operating costs. It is stated, moreover, that the trucks of individual distributors are delayed occasionally in picking up milk from producers' platforms. Such delays may cause deterioration of the milk. While the individual producer may not be responsible for such deterioration he is often penalized by having deductions made for high bacteria count, or his milk may be rejected altogether. It would seem, however, that a much more serious aspect of the problem is the overlapping of hauling. One railroad company and Bul. 534] An Analysis of the East Bay Milk Market 77 the local representative of one of the leading firms of truck manufac- turers were visited with a view to ascertaining" what possible econo- mies could be effected if transportation of all milk into the East Bay cities were centralized. Both agencies interviewed made a careful analysis of existing rates and the volume of milk obtained from the different country points. The considered opinion of representatives of both of these agencies was that transportation rates could be reduced at least 25 per cent if all hauling were centralized. The local representative of the truck-manufacturing company stated that nine trucks and trailers would be sufficient to handle the volume of milk now being hauled by some thirty trucks. It is estimated that a sav- ing of $75,000 or more a. year could be effected if transportation facilities were concentrated in the hands of one agency. It was stated furthermore that if the hauling of the East Bay and San Fran- cisco milk and cream supplies could be consolidated, still further reductions in hauling charges and thus increased savings could be effected. Consolidation of Hauling Facilities. — It is strongly recommended that the Cooperative Dairymen's League and the various distributors give serious consideration to the feasibility of consolidation of hauling facilities, preferably under the supervision of the Cooperative Dairy- men's League or of the distributors themselves. It would seem that the League is the logical organization to supervise or control hauling. It is a properly constituted legal entity. The fact that it represents about 80 per cent of the dairymen shipping market milk to the East Bay cities would enable it to make the best possible adjustment of shippers. Moreover if the League is to continue to win the support of distributors it is vitally interested in the prompt and regular delivery to the city plants of the highest quality of milk. To do this it must be able to exercise a close supervision over transportation. Diversion of surplus milk to condensaries also would be facilitated if the League had control over hauling facilities. It would not be necessary for the League itself to own and operate transportation facilities. The League could contract for this work to be done by a railroad company or a reliable trucking company. Such agencies could be required to put up bonds to guarantee the fulfillment of all the terms of the contract and especially to safeguard the League from any losses which might be incurred through delays in delivery of milk. The agency which secured such a contract could be required to install the most up-to-date equipment and to keep it in good running order. 78 University of California — Experiment Station Centralization of transportation facilities would be complicated somewhat if distributing' plants in the East Bay cities were widely scattered in different parts of the cities, The location of plants is shown in figure 10. It will be seen that all the plants are either Location of Distributing Plants in the East Bay Cities, May, 1931 A To SoctO. V/0 Coryumtl Br /dye ! 4 RICHMOND ! \ ^ ^^^^ \tft <,v 1 1 Hi 1 V '' ^sr^-N \ n V ^ vy,- j$ > 5 "1 f ^*~%o° J ■z. ALBANY A R " 1 lift \ gr'niteiff \ \ -1 ~J Ir/rc^ tJT —fMf*Y<" , -'- e \ \\ 1 ~&£*K»Ue \ Vf • ^ °«"'*2°^~*-M NOTE: £ACH DOT REPRESENTS ONE DISTRIBUTOR. TO C^ #1 W ^ ^>^i^ ^kJL I "* \ i^O a o >>- \^^QlS> SAN \ ° ft FRANC I5CO )) "^N, V i *l \ T 1 * \ V* 1 SAH LEANOrT afe / t» ^\ >i- ! ■> 1 >* t ■< HAYWRI^E. 5 \ SCALE IN MILES \ ^ 1 t J 4 V Fig. 10. — Nearly all the distributing plants are located either on one or other of the main highways into the East Bay cities or within a radius of 2 miles in Oakland. (Data from information supplied by the Alameda County Milk Dealers' Asssociation.) situated on (or just off) the main highways into the cities or are concentrated within a radius of about 2 miles in Oakland. This fact- would greatly facilitate the delivery of milk to city plants in the event of a centralization of hauling facilities. Bul, 534] An Analysis of the East Bay Milk Market 79 No doubt many difficulties would have to be overcome and many factors considered before a reorganization of the present methods of hauling milk could be effected. Many distributors may oppose a change because of the loss of revenue it may entail. It may be argued that a net profit on hauling enables distributors to work on a narrower margin. If this is so might it not be better to increase the margin between buying and selling prices of market milk? Economies effected through a more efficient and more economical system of haul- ing would more than compensate for an increase in distributors' margins. It should be pointed out in this connection that most of the distributors undoubtedly would be able to effect some reduction of overhead expense (in connection with clerical work and general super- vision of trucks) if hauling were performed by another agency. A change may be objected to by distributors because of the loss of adver- tising afforded them by their trucks. It would seem, however, that general industry advertising carried by trucks would be just as effect- ive in stimulating consumption as brand advertising by individual distributors. Most distributors have substantial investments in hauling equip- ment, mainly trucks, and would be opposed to any loss on such invest- ments. Arrangements could probably be made to compensate them for any loss they may incur in disposing of such equipment. Possibly if the reorganization of the hauling system could be made gradually, over a period of two or three years, it would be possible to arrange for individual distributors to operate their trucks until such time as they would normally have to be replaced. As soon as this occurs the League could take over the hauling of such distributors. Another possible plan would be for the League to purchase the trucks of the present distributors at a fair valuation and to dispose of them on the open market. Any loss incurred could be considered a first charge against any savings effected in reduced hauling charges. Another argument that may be raised by distributors against a change is that they would lose a valuable point of contact with pa- trons, if truck drivers were employed by some other agency. Under existing conditions, however, truck drivers do not come into close contact with dairymen. The loss of contact involved would not appear to be a serious difficulty. It is possible that a consideration of the concentration of hauling under the supervision of the Cooperative Dairymen's League may also involve a consideration of the feasibility of the pooling of cans. It would seem that if the pooling of milk bottles results in certain economies, it may be advantageous to pool cans as well. 80 University of California— Experiment Station If retail prices are reduced, as seems advisable in order to increase per-capita consumption, a reduction of prices paid to producers may be necessary, but every effort will have to be made to effect economies in the system of hauling", processing, and distributing as well. The situation confronting the market-milk industry of the East Bay is suffi- ciently serious to justify drastic efforts to reorganize the whole system of market-milk distribution. No phase of mill?: marketing is more in need of improvement than that of transportation. Much of the saving effected through a consolidation of hauling facilities might be passed on to the consumer in the form of lower retail prices. DISTRIBUTION OF MARKET MILK AND DISTRIBUTORS' MARGINS During 1930 about 12,322,000 gallons of market milk were dis- tributed in Alameda County. About 92 per cent of the population of this county is in the eight East Bay cities of Hay ward, San Leandro, Alameda, Oakland, Piedmont, Berkeley, Emeryville, and Albany (see p. 14). Assuming that the per-capita consumption throughout the county is more or less uniform, about 92 per cent of the total volume of market milk distributed in Alameda County in 1930, or approxi- mately 11,336,000 gallons, was consumed in these eight cities. It was also- shown that about 94 per cent of all market milk sold in Alameda County in October, 1930, was in the form of grade- A pasteurized milk (see p. 24). A check made for some of the other months of 1930 showed that this figure was fairly representative of the annual rela- tion of grade-A pasteurized milk to all milk. Assuming that the ratio of grade-A pasteurized milk to all milk sold is much the same in all parts of Alameda County, the volume of pasteurized milk distributed in the eight cities would be 94 per cent of 11,336,000 gallons, or approxi- mately 10,656,000 gallons. The volume of all other grades of market milk distributed in these cities would thus be about 680,000 gallons. The daily volume of all grades of milk distributed in these cities was about 31,000 gallons. From information obtained from the California State Departmet of Agriculture Bureau of Dairy Control at Sacra- mento and from the plants operating in Richmond (Contra Costa County) it would appear that approximately 1,500 gallons of milk were distributed in Richmond daily during 1930. The average amount of milk distributed daily in all the East Bay cities including Rich- mond and El Cerrito thus was about 32,500 gallons. However, as there is some variation in the quantity of milk consumed at different Bul, 534] An Analysis of the East Bay Milk Market 81 times of the year, the volume distributed some days would probably be as high as 35,000 gallons. Characteristics of Distributing Plants. — All the pasteurized milk and a large part of the other grades of milk were distributed in 1930 by 20 plants, 17 of which were in the eight East Bay cities in Alameda County and 3 in Richmond. There is a wide range in the volume of mLk distributed by these plants, as shown in table 24. Nine of the plants distributed less than 1,000 gallons of milk daily; 6 between 1,000 and 2,000 gallons; 2 between 3,000 and 4,000 gallons; and 3 over TABLE 24 Volume of Milk Handled Daily by Distributing Plants in the East Bay Cities, 1930 Volume in gallons* In eight East Bay cities in AlamedaCounty Richmond All East Bay cities Number of distributing plants in each size class Under 1,000 6 6 2 3 17 3 3 9 1,001-2,000 6 2,001-3,000 3,001-4,000 2 3 Total 20 * Maximum daily volume of milk handled =35,000 gallons; estimated combined capacity of all plants with existing equipment = 85,000 gallons. Sources of data: Records of the Alameda County Milk Dealers' Association, records of indi- vidual plants, and information obtained from individual plant operators. 4,000 gallons daily. All of the plants handling over 3,000 gallons daily are located in Oakland. According to information obtained from all the individual plants, it would appear that the combined capacity of all the plants is somewhat in excess of 85,000 gallons a day. 29 It will be seen that the combined capacity of all plants in the East Bay cities is greatly in excess of the market milk distributed. Undoubtedly the same volume of milk as is now distributed can be handled by far fewer distributors and at a lower unit cost. Most of the plants distributing market milk also handle market cream, ice cream, buttermilk, cottage cheese, butter, eggs, and other dairy products. Nearly all of the firms conduct a counter service or 29 Based on estimates of individual plant operators as to the volume of milk that could be handled with existing equipment, Many of the plants have building space for additional equipment, which could be installed without much delay. 82 University of California — Experiment Station operate a dairy lunch usually in the same building as their processing plants. Such dairy-lunch counters, however, constitute only a minor outlet for the milk and other products handled by individual plants. Most of the milk is delivered either directly to family residences or sold wholesale to independent or chain retail stores or to hotels, res- taurants, schools, confectioners, or bakeries. It is estimated that in March, 1931, roughly 50 per cent of all market milk was sold on retail delivery routes to family consumers ; most of the rest was sold whole- sale. No data are available on the trend in the relative volumes of milk sold wholesale and retail during the past few years. Most of the distributors interviewed, however, stated that retail sales of milk to families has decreased considerably during the past few years and that a large proportion of the consuming public is purchasing milk through retail stores. According to information obtained from dis- tributors towards the end of 1931, there has been a marked decrease since March, 1931, in the proportion of milk sold to family consumers and an increase in the proportion sold through retail stores. The opinion has been advanced that the reason for this marked shift in consumer purchasing to retail stores is that the 2-cent difference between store and retail delivery prices means more to consumers under present conditions. Information obtained from individual distributors indicated that there were, in March, 1931, about 290 delivery routes in the East Bay cities, including routes operated by producer-distributors of grade-A raw guaranteed and pasteurized milk and by peddlers. 30 On many of the routes milk was distributed to both wholesale and retail customers. This made it difficult to distinguish clearly between a wholesale and a retail route. However, classifying routes on the basis of whether retail or wholesale deliveries predominate, it is estimated that there were, in March, 1931, approximately 60 wholesale and 230 retail routes. Most of the distributors do not keep any records of the quantity of milk sold in different containers. Such data could be obtained from only six firms and are presented in table 25 in the form of percentages of all milk sold by these six distributors. It will be seen that about 86 per cent of the milk sold is in quart bottles, 4 per cent in pint bottles, 7 per cent in cans, and 1 and 2 per cent respectively in %-pint and %-pint bottles. The quart and pint bottles are sold mainly to families 3 o A peddler is an individual (or firm) who does not operate a processing plant but purchases his milk bottled from one of the processing plants and delivers it to his patrons. Bul, 534] An Analysis of the East Bay Milk Market 83 or through retail stores. The bulk milk is sold to hotels, restaurants, bakeries, and confectioneries. The %-pint and %-pint bottles are sold to hotels, restaurants, and schools. TABLE 25 Percentage of Milk Sold in Various Containers by Six Distributors Container Per cent of total milk sold 7 86 Pint bottles 4 1 2 Total 100 Source of data: Records of six distributing plants, July, 1930. Trend in the Number of Distributing Plants. — It was shown in table 2 that the total volume of market milk distributed in Alameda County has tended to decline since 1927. In the light of such a decline in total consumption, it is interesting to learn that the number of plants distributing pasteurized milk (and a large part of other TABLE 26 Number or Plants Distributing Pasteurized Milk, 1925-1931 Year Number of plants in eight East Bay cities* in Alameda County Number of plants in Richmond Total number of plants in all East Bay cities Number of plants ceasing to operate during year Number of plants that commenced to operate during year 1925 1926 18 19 16 16 14 17 18 1 1 3 3 3 3 3 19 20 19 19 17 20 21 3 2 1 1927 1928 1929 1930 2 3 1931 1 •As of July 31, 1931. Source of data: Records of the Alameda County Milk Dealers' Association. grades of milk) has increased during the past three years. The num- ber of plants distributing pasteurized milk during each of the years 1925 to 1931 is shown in table 26. The number of plants distributing milk in the East Bay cities of Alameda County decreased from 19 in 1926 to 16 in 1927 and to 14 in 1929. In 1930, however, the number 84 University of California — Experiment Station increased to 17 and in July, 1931, to 18. The number of plants in Richmond increased from 1 in 1926 to 3 in 1927, at which figure it has remained since. The total number of plants in all the East Bay cities decreased from 20 in 1926 to 17 in 1929 and increased to 21 in July, 1931. It should be pointed out that the figures in table 26 do not give an entirely correct picture of the increase during the past few years in distributive capacity of plants in the East Bay cities. Several of the plants have been remodelled and their capacity in- creased by the installation of additional and more modern equipment. Many of the distributors stated that the capacity of the 21 plants operating in the East Bay cities in the early part of 1931 was much greater than that of the 20 plants in operation in 1926. During the period of seven years shown in table 26, 5 plants went out of business, 3 in 1927, and 2 in 1929. During the same period, however, 7 new plants began operating, 1 in 1926, 2 in 1927, 3 in 1930, and 1 in 1931. The market-milk industry is generally regarded as being relatively stable as compared with other industries. It was shown above (p. 46) that buying prices of market milk often remain unchanged for several years at a time. The same is true of retail prices (see table 5). Many of the present producers of market milk and many of the distributing firms have been operating for a great many years. In the light of these facts it seems to be important to analyze somewhat fully the reasons for the comparatively rapid turnover in the number of plants during the past few years. Consolidation in Milk Marketing. — Those who are familiar with conditions in the dairy-manufacturing industry in California and elsewhere in the United States know that during recent years there has been a movement towards the consolidation of dairy-processing facilities. This movement in the dairy industry has been analogous to similar movements in other branches of industry and commerce. Many of the erstwhile independent dairy-manufacturing plants in different parts of California, including the East Bay cities, have been acquired by some of the larger state-wide and nation-wide companies. In many instances the plants acquired have been closed down because it was considered that a larger volume of business could be handled more efficiently through one central plant. While a few of the plants that discontinued operating during the years 1927 to 1929 had to close down because their owners or operators were unable to make them pay, many of them were closed down after they had been pur- chased by one or other of the larger distributing firms. It was antici- Bul. 534] An Analysis of the East Bay Milk Market 85 pated that the customer patronage of the plants closed down would be transferred to the purchasing" firm, which would be able to handle the larger volume of business through one plant at a lower unit cost. It was believed that a few large firms could distribute the same volume of milk in the East Bay cities at a lower unit-cost than could a larger number of smaller firms. Overlapping of hauling (from country to city plants) and city distribution facilities could be greatly reduced. It is by no means uncommon to find half a dozen or more distributors ' trucks delivering milk in an area in which one or at most two trucks would be sufficient. It is claimed, moreover, that a. dis- tributing firm handling a large volume of milk could secure many internal and external economies of operation and could make available to the consuming public a higher and more uniform quality of product. The question natural^ arises why, if the benefits to be derived from large-scale operaton are so obvious, the plants closed down, as a result of consolidation, were replaced so rapidly by new plants? One of the reasons was that while the bigger firms had, in many instances, paid considerable sums for the goodwill of the plants closed down, they were not always able to keep the consumer patronage of those plants. Goodwill is often a personal asset, in which case the patronage attached to goodwill may not be transferred to another person or firm. In most cases operators or employees of plants which had been closed down after sale to one or other of the bigger companies opened up new plants in the East Bay cities and were able to regain many of their former customers. It would seem, however, that the main reason w r hy so many new plants were opened up during the past few years was that the process- ing and distributing of milk in the East Bay appeared to be a profit- able field of investment. It is a well-established economic fact that individuals will not invest capital in an enterprise unless they expect to obtain therefrom over a period of years a return as high as, or higher than, they could expect from an equal investment in some other enter- prise. In the case of market milk the return on capital investment is equal to the difference between the amount paid to producers and the proceeds of sales, less all expenses of operation, including operator's wages and depreciation on plant and equipment. The most accurate way of ascertaining the relative profitableness of distributing market milk in the East Bay cities during the past few years would be to obtain from individual distributors data on the 86 University of California — Experiment Station gross and net profits 31 made by them annually in handling market milk. There are, however, many practical difficulties in the way of obtaining such information, As stated above, nearly all the distribut- ing firms handle other products, such as butter, ice cream, and eggs, as well as market milk. Many of the firms do not keep accounting records in sufficient detail to make possible a segregation of the gross profits and costs directly attributable to the handling of the various commodities. For instance, several of the distributors lump together in one account the proceeds of sales of all the products handled. More- over, a few of the firms which are just getting started have high operating expenses. As the volume of business handled by such firms increases, their unit operating expenses will decrease. Distributors' Margins. — A more direct but less accurate indication of the relative profitableness of distributing market milk can be obtained from an analysis of the margins on which distributors han- dled market milk during different years. Individual distributors aim at working on a margin which is wide enough to cover all per-unit operating expenses, including depreciation on plant and equipment and interest (or return) on investment. In table 27 are shown the buying prices of market milk per pound of milk fat and per quart of milk (testing 4 per cent milk fat), and the selling prices and approximate distributors' margins per quart of pasteurized milk sold on retail delivery routes for the period 1925 to June, 1931. It will be seen that distributors' margins as calculated in this table decreased from 5.41 cents per quart in 1925 to 5.15 cents in 1926. In 1927 and 1928, however, distributors' margins increased to 5.78 cents and 6.61 cents a quart, respectively. In 1930 margins declined, largely because of the milk war which broke out in October of that year. This was also responsible for the low margin, 5.65 cents a quart, in January, 1931. On January 17, buying prices were increased to 74 cents a pound of milk fat and retail delivery prices to 13 cents a. quart, Distributors' margins were increased to 6.64 cents a quart, which was higher than during any of the previous years covered in this table. On July 17, 1931, prices to producers were decreased to 70 cents per pound of milk fat, retail delivery prices remaining unchanged at 13 cents a quart. This resulted in an increase of distributors' margins to 6.98 cents. 31 Gross profits c= proceeds of sales less amount paid to producers for market milk. Net profits = gross profits less expenses of processing and distribution, includ- ing operator's wages and depreciation on plant and equipment. Bul. 534] An Analysis of the East Bay Milk Market 87 Margins could be worked out similarly on the basis of quart bot- tles sold wholesale and on pint bottles sold on retail delivery routes and wholesale. Some difficulty would be encountered, however, in obtaining accurate data on wholesale prices of bottled milk owing to the practice during past years of giving special discounts, frequently in the form of lower prices on other products sold to wholesale cus- tomers. If such data could be obtained it is probable that figures on margins on pint bottles and on quart bottles sold wholesale would show a trend similar to those shown in table 27. TABLE 27 Buying Prices, Ketail Prices, and Distributors ' Margins on Quart Bottles of Pasteurized Milk Sold on Eetail Routes in East Bay Cities Year Buying price per pound of milk fat Buying price per quart of milk (4 per cent milk fat) Average retail price per quart Distributors' margins per quart 1 1 3 4 1925 1926 cents 76 6 79 4 84.0 86.0 86 78 67 74 74 74 74 74 72 70 70 70 70 70 cents 6.59 6 85 7 22 7.39 7.39 6 71 5.75 6 36 6 36 6.36 6.36 6 37 6.19 6 02 6 02 6 02 6 02 6 02 cents 12 12 13 1 14 14 13 3 11 4 13 13 13 13 13 13 13 13 13 13 13.0 cents 5 41 5.15 1927 5.78 1928 6.61 1929 6.61 1930 6.59 1931: January February 5.65 6.64 March April 6.64 6.64 6 64 June 6.64 July 6.81 6.98 6.98 6.98 November 6.98 6.98 Sources of data: Col. 1 : From table 18. Col. 2: Prices in col. 1 divided by 0.086, the amount of milk fat in pounds in a quart bottle of milk testing 4 per cent milk fat. Col. 3: From information supplied by the Alameda County Milk Dealers' Association. Col. 4: Col. 3 less col. 2. It is necessary to point out that considerable caution should be exercised in interpreting figures on distributors ' margins. Frequently a great deal of laxity is shown in analyzing margins — laxity which may lead to unwarranted conclusions. The figures in column 4 of table 27 are intended merely to indicate that the general trend of distributors' margins has been upward. For several reasons, which 88 University of California — Experiment Station are stated below, they do not reflect accurately the absolute or even the relative increase in margins generally nor are they necessarily indi- cative of the trend of the actual margins of any one distributor. The figures shown in column 1 of table 27 represent the basic buy- ing prices for market milk — the prices paid for the quantity of milk supplied by dairymen under their quotas as established by distributors or the Cooperative Dairymen's League (see p. 99). Prior to August, 1930, many plants purchased their patrons' surplus milk at prevailing prices for manufacturing milk. It is stated that many distributors sold part of this surplus milk as market milk. Distributors who fol- lowed such a practice thus purchased part of their market-milk sup- plies at prices lower than those shown in table 27. To the extent that this took place, the margins of individual distributors during earlier years would be wider than those shown in table 27. According to the scoring of the distributing plants made by the Oakland and other city health departments, it would appear that daring most of 1930 and the first six months of 1931 nearly all dis- tributors standardized bottled milk at 4 per cent milk fat. A few distributors, however, standardized at a lower test. Although there are no data on the milk-fat content of bottled milk distributed by the different plants prior to 1930, information obtained from the various health authorities and from individual distributors indicates that several distributors did not standardize their bottled milk as high as 4 per cent during previous years. If this was the case, the buying prices per quart bottle of milk for such distributors would be lower than the figures shown in column 3 and their margins higher than those shown in column 4. For instance, if bottled milk was standard- ized at 3.8 per cent milk fat in 1925 instead of 4 per cent, as shown in table 27, the buying prices per quart would be 6.26 cents and the distributors' margin 5.74 cents instead of 5.41 cents. Even if this figure is correct there would still have been a substantial increase in distributors' margins between the years 1925 and 1930. Prior to January, 1931, many distributors were in the habit of giving special discounts or concessions in order to win customers from competitors or to retain good customers. Such discounts and conces- sions took various forms and frequently were difficult to detect. They varied all the way from special cash discounts on bottled milk, ice cream, and butter to the installation of ice boxes and refrigerators in the stores of wholesale customers. The granting of special discounts in any form was expressly abolished in the new contracts signed in January, 1931, between the Cooperative Dairymen's League and indi- Bul. 534] An Analysis of the East Bay Milk Market 89 vidual distributors. To the extent that special discounts were granted by individual distributors prior to October, 1930, their selling prices per quart were reduced, and their margins in earlier years would thus be lower than those shown in table 27. Smaller quantities of milk are now sold in bulk because the state Pure Milk Act of 1927 requires that milk served in hotels and restau- rants must be in sealed containers. Milk sold in bulk usually has a lower milk-fat content than bottled milk. The change in the propor- tion of milk sold in bulk has resulted in a higher buying price for the same volume of milk now sold in %-pint and %-pint bottles. It is doubtful, however, whether this has affected distributors' margins adversely, since the selling price of milk in the smaller containers is usually greater in proportion than that of milk in bulk or in quart bottles. It was stated that the proportion of milk sold wholesale has in- creased considerably during the past few years and especially since March, 1931. Several of the distributors sell practically all their milk wholesale to chain and independent stores, hotels, schools, and res- taurants. Others sell most of their milk on retail delivery routes. Even most of the latter, however, are selling a larger proportion of their milk wholesale than they did a few years ago. Other firms, which a few years ago sold most of their milk on retail routes, now sell most of it wholesale. The trend of margins for those distributors who have been selling most of their milk wholesale for several years would be similar to that shown in column 4 of table 27, though of course their absolute margins per quart bottle would be smaller. For those distributors, however, who at one time were selling most of their milk on retail routes but who during the past few years have been selling a progressively larger proportion wholesale, the trend of actual margins would not be as great as in this table and may even be down- ward. However, in the case of such distributors, the trend in unit costs of delivering and selling milk must be considered along with margins. Cost of Processing and Distribution. — Changes in the margins of distributors must be interpreted in the light of changes in the costs of processing and distributing market milk. As stated above, distributors aim at working on a margin which, over a period of time, will cover unit operating costs and provide a return on capital. If unit costs increase absolutely as rapidly as the increase in margins, the rate of return on invested capital will not be affected. If unit costs rise absolutely more rapidly than margins, returns on capital will be 90 University of California — Experiment Station reduced, and distributors will endeavor to reduce unit costs or to increase margins, or both. If unit costs increase less rapidly than margins or are reduced without a corresponding" reduction in margins, returns on invested capital will increase. Unit costs of distribution depend to a considerable extent upon the price of the chief factors that enter into the cost of processing, selling, and delivering market milk, and upon the volume of business handled by individual distributors. During the years 1925 to 1929, when margins showed the great- est increase, certain conditions probably resulted in an increase in some of the cost factors. Since 1925 sanitary requirements relative to the processing and distribution of market milk have become more strict. Many distributors, moreover, were attempting, by a more careful supervision of the production of dairymen and of the details of plant operation and distribution, to make available to consumers a higher quality of milk. It is stated also that restrictions of trade unions on the conditions of employment of union men also resulted in an increase of labor costs. On the other hand, the improvement of many parts of plant equipment and the decrease in the prices of these items and of supplies such as gasoline, oil, tires, and automobile parts, especially since 1929, have undoubtedly resulted in a decrease in some cost factors. Although the total volume of milk distributed in Alameda. County remained more or less constant during the years 1925 to 1929, the number of plants decreased from 20 to 17, largely as a result of con- solidation. It was pointed out above that the consolidation movement was predicated to a certain extent on the assumption that the larger firms would be able to operate at a lower unit cost, If this assump- tion was correct, it is probable that the lower unit costs resulting from the bigger volume handled by the larger firms tended to offset any increase in their costs arising from stricter sanitary control, quality im- provement, and trade-union restrictions on conditions of employment. The facts and arguments set forth above indicate that during the years 1925 to 1929 distributors' margins increased more rapidly than unit costs, especially for the larger firms. This must have resulted in increased returns on the capital invested by these firms in distributive facilities. Since 1928 and 1929, however, it is probable that in spite of a marked decrease in many of the chief cost factors of distribution, unit costs of distribution have tended to increase in the case of several firms, especially those which in the past distributed most of their milk Bul. 534] An Analysis of the East Bay Milk Market 91 on retail delivery routes. The total volume of milk distributed in 1930 was not much greater than that distributed in 1929 and was some- what less than the volume for 1928. Although final figures on distri- bution in 1931 are not yet available, indications are that the total volume in 1931 will not be much greater than in 1930. The number of plants, however, increased from 17 in 1929 to 21 in 1931. Although it is possible that the volume of milk handled by one or two firms that were operating in 1929 may have increased, most of those firms must, in 1931, have handled a smaller volume of milk than they did in 1929. This would have tended to increase their unit costs of distribution. Another factor that has tended to increase the unit costs of dis- tribution for some firms is that the proportion of milk sold on retail delivery routes, especially since the beginning of 1931, has decreased appreciably. Even if the firms, which have experienced a decline in their retail delivery sales, have increased their wholesale sales propor- tionately, their unit costs of delivery must have increased to a certain extent as a result of the smaller loads carried on retail delivery trucks. It is often impracticable to consolidate two or more delivery routes immediately after the volume of sales declines. The patronage of many families is secured frequently through contact with a particular milk driver and may not be transferred to a new driver. Furthermore, although the volume delivered on two routes may have declined, the combined volume remaining may be more than could be handled by one truck. In many instances, the decline in the retail sales of one firm has not been offset by a corresponding increase in its wholesale sales. The volume lost has been secured by firms which had connec- tions with chain or independent retail stores. This has tended to decrease the unit operating costs of those firms which sell most of their milk wholesale. While unit costs of distribution of some distributors may have increased since 1929, distributors' margins, as pointed out above, have also been increased. High margins relative to unit costs act in a vicious circle. The fact that margins increased more rapidly than unit costs prior to 1929 attracted additional distributors into the market-milk industry. The increase in prices to consumers probably was largely responsible for the decrease in total and per-capita consumption since 1926. The decrease in consumption in turn decreased the volume of milk handled by the greater number of distributors. This decrease in the volume handled by individual plants tended to increase unit costs. Higher unit costs in turn cause distributors to strive for higher margins. It is 92 University of California — Experiment Station significant that several distributors stated that they considered that the margins in 1929 were ample to provide them with a fair return on their investment but that the margins in 1931 were barely sufficient to meet operating expenses. A wide spread between margins and unit costs, moreover, tends to perpetuate or to intensify certain objectionable trade practices which eventually may lead to disruption in the market-milk industry. It is claimed by many persons who have been closely connected with the market-milk business of the East Bay cities that the widespread adop- tion of the practice among distributors of giving customers special discounts was made possible because margins were too high. A few distributors, finding their profits increasing, attempted to expand their business and so their profits by offering special discounts to win customers away from competitors. Other firms adopted the prac- tice in order to maintain their customers. The ill feeling and distrust engendered through the granting of special discounts by some market- milk peddlers and distributors was one of the prime causes of the milk war which broke out in October, 1930. A closer adjustment of margins to unit costs would tend to discourage the granting of special discounts. It is probable that if the lower unit costs resulting from the in- creased volume of milk handled by the larger distributing firms up to 1929 had been accompanied by a decrease instead of an increase in margins, additional distributors would not have been attracted into the market-milk business of the East Bay cities. It is possible, more- over, that some of the less efficient of the remaining distributors might have been forced out of business because they would have been unable to operate on a lower unit-cost basis. If this had happened, it would have increased still further the volume of business of the more efficient firms. The prices paid to producers during the years 1925 to 1929 seem to have been sufficient to call forth the required volume of milk. If the savings resulting from lower unit costs had been passed on to consumers in the form of lower retail prices, it would have done much to arrest the decline in per-capita consumption since 1926. Another advantage of low margins, which often is not fully appre- ciated, is that distributors individually and collectively are forced to greater efforts to effect economies in the system of distribution. Or, put in another way, there is not the same incentive for distributors to effect economies which may be distasteful if the spread between unit costs and margins is great. Bui,. 534] An Analysis of the East Bay Milk Market 93 An analysis of the operating expenses of a number of distributors showed that salaries and wages constituted over 50 per cent of all costs of processing and distribution ; the wages of truck drivers alone constituted from 20 to 30 per cent of all expenses, Most of the truck drivers belong to a trade union which is opposed to any reduction of wages. During the first few months of 1931 the distributors nego- tiated with the union with a view to a reduction of wages. After several weeks of negotiation, however, they agreed not to attempt to reduce wages of truck drivers. Many distributors contend that the decline in the cost of living would justify some decrease in the wages of truck drivers. While distributors are able to maintain a high margin, however, there is little incentive for them to push this matter further. Moreover, the fact that distributors' margins have riot been reduced weakens their arguments in trying to get the trade union to agree to a reduction of wages. It would appear, furthermore, that the margin allowed retail stores for the handling and sale of milk is too high. Milk is delivered to retail stores at 9 cents a quart (6 cents a pint), the minimum quantity delivered being one case. Stores are required to sell milk to customers at 11 cents a quart (7 cents a pint). There is thus a spread of 2 cents a quart between the stores' buying and selling price. Nearly all stores have a daily turnover of milk. The investment in refrigerating equipment and floor space is negligible compared with the volume of milk handled annually. It was shown above that dis- tributors' buying price per quart was 6.45 cents (see table 27). The distributors' margin on a quart bottle of milk sold to stores at 9 cents is thus only 2.45 cents. This margin, which is only 0.45 cents a quart greater than that allowed the store, has to cover the unit cost of processing, delivery, and overhead, including depreciation of plant and equipment and return on capital invested. Difficulty of Determining What Is a Fair Margin. — Many persons maintain that a "fair" margin for distributors can be determined by making an analysis of the costs incurred by various firms in processing and distributing market milk. Experience has shown, however, that it is just as impracticable to attempt to determine by a cost analysis, what is a fair margin for distributors at any given time as it is to establish buying prices for market milk on a basis of costs of production. The reasons in the two instances are similar. It is extremely difficult to determine accurately what it costs individual distributors to handle market milk. Nearly all distributors handle other products besides milk. Their records in most instances are not 94 University of California — Experiment Station sufficiently accurate to make possible a segregation of the expenses directly attributable to the handling of milk only. Some distributors sell all or most of their milk wholesale; others most of it retail. Distributors sell varying proportions of milk in the different containers. Even if it were possible to determine accurately the distributing costs of the various firms, it would be found that there is a wide range in the costs of individual distributors. One distributor's costs may be high because he has just started operating and is still building up a clientele. Land, buildings, and equipment may have been purchased at different times and at different prices. Depreciation may be written off at different rates. Finally, some plants will be operated more efficiently than others. What cost should be used as the basis for the "fair" margin? If an average cost is used, the less efficient firms would be operating at a loss. Margins would have to be revised whenever there is a change in the prices of the various cost elements, in the number of distributors operating at a particular time, or in the volume of milk distributed. As unit costs of distribution vary to a considerable extent in relation to the total volume of milk distributed, an increase in total consumption would make possible a reduction in unit costs and margins. It does not follow, however, that if con- sumption decreased, margins should be increased. A decrease in consumption may be due to high retail prices and wide margins. Costs, moreover, may be high because margins were so wide in the past as to attract additional distributors into the market or to have made it unnecessary for distributors to effect certain economies. A reduction in margins may force some of the less efficient distributors out of the market and force the remaining distributors to effect necessary econo- mies. If long-time stability is to be maintained in the market-milk industry, distributors' margins must be adjusted from time to time so as to bring margins more nearly into line with the costs of the more efficient distributors. METHODS FOR ESTABLISHING PRICES In the preceding sections an analysis has been presented of some of the most important long-time relations between retail prices of market milk and total and per-capita consumption, of the effect of prices paid to producers on subsequent production, and of the factors affecting distributors' margins and unit costs of processing and dis- tributing of market milk. It was shown that the buying and retail prices for market milk prevailing during the past few years and the Bui,. 534] An Analysis of the East Bay Milk Market 95 spread between distributors' margins and unit costs were largely responsible for the conditions of the market-milk industry at the time this study was made. With these facts as a background, it is important to analyze briefly what methods existed in the past for interpreting the factors affecting retail prices and margins; in what respects the price-making or price-interpreting methods were defec- tive ; and what steps, if any, must be taken to improve such methods so that buying and retail prices may be so regulated from time to time as to ensure long-time stability in the market-milk industry. Collective Bargaining. — A survey of the methods of establishing buying prices for market milk in different metropolitan centers in the United States shows that in most cases prices are established by some form of collective bargaining. Under this method representa- tives of the producers in each milk shed meet with representatives of distributors periodically for the purpose of deciding upon equitable buying prices for market milk. Producers usually are represented by a cooperative association which embraces all or a majority of the dairymen in each milk shed. Distributors usually, though not always, are represented through a trade organization which includes most of the distributors in the market center. Some form of collective bargaining has been in existence, off and on, in the East Bay area since about June, 1917. About the middle of 1915, a group of distributors in the East Bay cities of Alameda County formed an unincorporated trade association known as the Alameda County Milk Dealers' Association. This organization, which is still in existence, embraces practically all the distributors in the East Bay cities, including Richmond. It also includes in its member- ship several of the peddlers of market milk. The central purpose of the Alameda County Milk Dealers' Association is to promote the welfare of the milk-marketing industry of the East Bay cities. To this end it may carry on research into quality and marketing condi- tions ; establish rules of conduct and trade practices to be observed by its members ; and meet with producers individually or collectively for the purpose of adjusting prices or ironing out difficulties. During recent years the association has given a great deal of attention to the problem of special discounts and methods of soliciting customers. Any distributor who has reason to believe that a competitor has employed unfair means to secure a customer may bring the matter before the weekly meeting of the Association. Such complaints are immediately investigated and the results of the investigation placed before the meeting. The Secretary of the Alameda County Milk Dealers' 96 University of California — Experiment Station Association stated that this method of regulating competition between distributors has done a great deal to remove the chief cause for distrust and dissension among distributors. The earliest known cooperative association which bargained for the sale of members' milk to distributors in the East Bay cities was the Milk Producers Association of Central California, with headquarters in Modesto. While this organization's chief activity was the manu- facture of butter and other dairy products, it established a wholesale market-milk branch in Oakland in June, 1917. It soon became appar- ent, however, that the interests of market-milk and manufacturing- milk-producing members would be served best if the Oakland branch were entirely separated from the Modesto branch. As a result, the producers of market milk withdrew from the Milk Producers Associa- tion of Central California in January, 1921, and formed the East Bay Milk Producers Association with headquarters in Oakland. The new association took over the plant and equipment in Oakland of the Milk Producers Association of Central California, and continued the policy of selling its members' milk to East Bay distributors. Most of the latter, however, also purchased milk from dairymen who were not members of the East Bay Milk Producers Association. Continuous friction prevailed between distributors and the East Bay Milk Producers Association as to the buying prices of market milk. Feeling among the distributors against the association became so intense that distributors endeavored to obtain more and more of their supplies from other sources. A few distributors refused to purchase any milk from the association. The members of the associa- tion finding the outlet for their milk thus shut off, decided to enter into the retail distribution of market milk. A new association, known as the Producers Milk Company, was formed early in 1925 and pur- chased a distributing plant in Oakland. This company, organized by the members of the East Bay Milk Producers Association and affiliated with it, purchased all its milk supplies from the latter organ- ization. A milk war which lasted for several months resulted. The Producers Milk Company continued to operate until 1928 when it sold its plant to an independent distributing firm. Meanwhile, how- ever, the membership of the East Bay Milk Producers Association continued to decline and the Producers Milk Company was forced to purchase a part of its supplies from other sources. The East Bay Milk Producers Association remained in existence until 1930, when it was dissolved. Bul, 534] An Analysis of the East Bay Milk Market 97 Cooperative Dairymen's League. — In September, 1925, another group of market-milk producers formed the Cooperative Dairymen's League. The purpose of this new association also was to bargain with distributors for the sale of its members' milk. The League, although it was an entirely separate organization from the East Bay Milk Producers Association, had a great deal of difficulty in obtaining recognition from the distributors, who, as a result of their previous experience, were somewhat suspicious of another producers' coopera- tive association. For several months distributors refused to purchase any milk from the League although they were willing to deal with members direct. The moderate attitude of the board of directors and officials of the League, however, gradually allayed the suspicion of distributors. In January, 1927, the distributors, through their trade organization, the Alameda County Milk Dealers' Association, agreed to negotiate with the League for uniform prices for market milk, such prices to apply to milk purchased from nonmembers as well as members of the League. Many of the individual distributors agreed at the same time to purchase at least part of their supplies from the Leasne. Individual distributors, however, retained the rig-lit to stipulate the basic quantity of milk that would be received daily from individual dairymen, who continued to dispose of their surplus milk as they saw fit. Payments were made direct to members and not to the League. Distributors agreed to deduct the League's dues from the amounts payable to members and to pay them over to the League monthly. It was agreed, furthermore, that the prices paid to producers were to be regulated according to the retail and wholesale prices of milk in the East Bay cities. If the retail price was 12 cents a quart and the wholesale price (to stores) was 8 cents, the price paid to pro- ducers was to be 23% cents a gallon for milk to be sold retail and 22% cents for milk to be sold wholesale. If retail prices were estab- lished at 13 cents a quart and wholesale prices at 9 cents, the buying prices would be increased to 25% cents and 24% cents a gallon respectively. From January 20, 1927, to November 10 of the same year, buying prices for market milk were maintained at 25% cents and 24% cents a gallon, retail and wholesale prices being 13 cents and 9 cents a quart respectively. The League and the Alameda County Milk Dealers' Association agreed to a further increase of buying prices to 27% cents and 26% cents a gallon as from November 11, 1927, retail prices being increased to 14 cents and wholesale prices to 10 cents a quart. These prices were maintained until April, 1930, 98 University of California — Experiment Station when buying prices were decreased somewhat. Retail and wholesale prices of bottled milk, however, remained unchanged until October, 1930. During the whole of this period the membership of the League continued to grow steadily, as is shown in table 28. The membership increased from 42 in September, 1925, to about 118 in 1930, this number comprising about 60 per cent of all the dairymen shipping market milk into the East Bay cities. This increase in the membership of the League placed it in a much stronger bargaining position in 1930 than in any previous year. Upon the dissolution of the East Bay Milk Producers Association in 1930, moreover, the League became the only producers' association in the East Bay milk shed. Its mem- bership increased from 118 in 1930 to 160 in 1931. The conservative and moderate policy followed by the League had won the confidence of distributors. Owing to the rapid fall in prices of manufacturing milk, many members of the League were desirous that a more economical method be developed for handling their surplus milk. Contracts of August, 1930, and January, 1931. — As a result of representations by the League, distributors agreed in August, 1930, to purchase all their milk from or through the League, except such part of their supplies as was obtained from nonmember patrons who had TABLE 28 Membership of Cooperative Dairymen's League, 1925-1931 Year Number of members 1925 42 1926...; 50 1927 66 1928 70 1929 82 1930 118 1931* 160 * As of December 31, 1931. Source of data: Records of Cooperative Dairymen's League. permits at the time to ship milk to the East Bay cities, at prices to be established by negotiation between the League and the Alameda County Milk Dealers' Association. Distributors agreed at the same time that they would not take on any new shippers unless they first became members of the League. The agreement between the League and the Bul, 534] An Analysis op the East Bay Milk Market 99 Alameda County Milk Dealers' Association was embodied in uniform contracts signed by the League and individual distributors. These contracts remained in force until January, 1931. During the milk war, which lasted from October, 1930, to the middle of January, 1931, dis- tributors continued to purchase their milk supplies as provided for in their contracts, except that the provisions as to buying prices and resale prices were suspended. At the conclusion of the milk war on January 17, 1931, new contracts 32 similar in most respects to those signed in August, 1930, came into effect. Provision was made in the later contract for lower buying and resale prices and for the payment of 2 cents per pound of milk fat into escrow (see p. 107). Prices to be paid by distributors were reduced to 75 cents per pound of milk fat. Resale prices were established at 13 cents a quart on retail delivery routes and 9 cents a quart wholesale. The granting of discounts in any form was to be regarded as a reduction in prices and thus a violation of the contract. The contract was to remain in force until July 17, 1931, and could be renewed from month to month thereafter. Under the arrangements that came into force in August, 1930, payment for all milk purchased from the League was to be made directly to the League and not to individual members as had previously been the case. Payments for milk purchased from nonmembers were to be made directly to such shippers. Distributors, however, agreed to deduct V2 cen t a gallon from all payments due to nonmembers and to pay the amounts so collected over to the League monthly. Distributors were not required to contract for a stipulated amount of milk daily ; the League agreed to sell to each distributor only such quantities of milk as he from time to time required for purposes of resale as market milk. The League was to be solely responsible for the disposal of all milk produced by members and nonmembers in excess of what could be sold to distributors as market milk. The basic quotas of members were to be established by the League as provided for in its regulations. Distributors agreed, furthermore, to establish quotas for nonmembers on a basis similar to that of members. This method of handling the surplus has many advantages over the method in force prior to August, 1930, under which individual distributors contracted direct with each shipper for a fixed amount of milk daily and under which individual shippers were responsible for the disposal of their own surplus. Under the old method, dis- tributors frequently found that the quantity of milk obtained from 32 A copy of the contract entered into by the League and individual distributors on January 17, 1931, is shown in the appendix. 100 University of California — Experiment Station their patrons was in excess of what they could distribute as market milk. They were forced, on such occasions, to manufacture the excess milk into butter or other products with a lower marketable value than fluid milk. Under the new method, distributors can keep their sup- plies more closely adjusted to their sales. The League is able, more- over, to divert all surplus milk (producers' and League's surplus) directly from members' dairies to nearby condensaries at a much lower hauling cost than if such milk had been transported into the cities. It is possible for the League to arrange for all the milk of some members to be shipped into the cities, while all the milk of other members can be shipped to condensaries. Members, however, are credited with the buying price for market milk on their quotas less cost of transportation to city plants regardless of whether their milk was sent to condensaries or to distributors in the East Bay cities. The savings effected on transportation accrue to the League and can be utilized to reduce the losses incurred by the League in disposing of surplus quota milk. Every effort is made to allow distributors to select the dairymen whose milk is shipped to them. A dairyman can be transferred from one distributor to another with the consent of both distributors. As the quotas of all dairymen are established in a uniform manner, discrimination in favor of or against individual producers is much less probable. The agreement by distributors not to take on any new shippers unless they first become members of the League places considerable power in the hands of the latter body in the way of limiting the number of producers who can ship milk into the East Bay cities. It would be very unwise, however, for the present mem- bers of the League to -attempt to make the League a closed association by arbitrarily refusing to accept as new members dairymen who are not at present shippers of market milk. Such a policy would tend to encourage excluded shippers to form another association and to enter into the distribution of market milk themselves. It would be better to discourage new dairymen from entering the East Bay milk market by lowering buying prices for market milk. Price should be the main regulator of the number of market-milk shippers and the volume of production. Officials of the League state that it is their policy to accept as members any producers who are able to comply with the regulations of the various city health departments. It would seem, however, that the League would be justified in establishing the basic quotas of new market-milk dairymen for the first year or two on a somewhat less favorable basis than that of Bul. 534] An Analysis of the East Bay Milk Market 101 older members, in view of the fact that new members will be getting the benefits of a going concern. It is understood that the board of directors of the League is considering the establishment of new members' quotas during the first year of their membership on the basis of 50 per cent of their production during the previous months of September to January. If this is done the percentage quota could be increased annually so that after three years the quotas of new members would be established on the same basis as that of the older members. The question has been raised as to whether there is need for the basic-quota system in the East Bay milk shed, in view of the fact that there is not much seasonal variation of production (see p. 39). One of the main purposes of basic-quota or basic-surplus plans in the various milk sheds in the United States is to encourage market-milk dairymen to produce a more or less uniform supply of milk during the different months of the year. 33 It should be pointed out in this connection that there is a considerable seasonal variation in the pro- duction of manufacturing milk in the East Bay milk shed. Dis- tributors and officials of the Leagne contend that the system of establishing quotas for individual market-milk producers has been instrumental largely in lessening the seasonal variation of market-milk production, and that if the quota system is abolished there would be a tendency for seasonal variation to increase. It would seem that the system of establishing quotas should be retained. It is recommended, however, that the League give serious consideration to the establish- ment of members' quotas on an average of individual members' daily production during the base period (September-January) of the pre- ceding three years instead of just one year as at present. Such a change would tend to act as a check on the rate at which individual members can expand their production. Under such a plan it would take three years to increase a. member's quota to the full extent of his expansion of production in any one year. This method of estab- lishing quotas would seem to be more equitable from the viewpoint of individual producers. The volume produced by any one dairyman may be greatly reduced during the base period for reasons beyond his control. Such a member would be unduly penalized during the following year, whereas, if his quota were established on a three-year average, it would be decreased only one-third of the contraction of production. 33 See : Metzger, Hutzel. Cooperative marketing of fluid milk. U. S. Dept. Agr. Tech. Bui. 179:29-45. 1930. 102 University of California — Experiment Station The permanence of any system of collective bargaining in the sale of market miik depends to a considerable extent upon the moderation and understanding between producers and distributors. During the past few years distributors and producers have evolved a good system of collective bargaining. The relation between the two groups seems to be very friendly. Special efforts are made by the League to acquaint distributors with producers' problems, and to comply with any reasonable requests emanating from individual distributors or from the Alameda County Milk Dealers' Association. Officials of the League are invited to attend the weekly meetings of the dis- tributors' association. There are frequent informal discussions between the officials of the two organizations on matters of common policy. It would appear, however, that prices during the past few years have been regulated not so much on the basis of the fundamental economic factors underlying milk production and marketing as on a basis of the bargaining advantage of the two groups. In negotiating prices both the League and the Alameda County Milk Dealers' Association seem to have been concerned primarily with the immediate group interests of their own members rather than with the welfare of the milk-marketing industry as a whole. As long as the League was able to obtain a satisfactory price for its members' milk it gave little consideration to the width of distributors' margins. Distrib- utors, on the other hand, appear to have been willing to pay the prices for market milk demanded by the League, provided their margins were wide enough. Up to the time this study was made, very little effort, if any, had been made to assemble and interpret information relative to the long-time factors influencing production, consumption, and distributors' margins. It is difficult to see, however, how prices can be so regulated as to maintain long-time industry stability without information of this nature. Dangers in Collective Bargaining. — There is in all systems of col- lective bargaining the inherent danger that prices and margins may be higher than economic conditions justify, especially if reactions to high prices and margins take some time to materialize. This is par- ticularly true in the market-milk industry. High retail prices do not result immediately in a reduction of consumption, except during times of business depression and decreased purchasing power, when declines in both total and per-capita consumption may be fairly rapid ; nor do producers respond immediately to increases in the prices paid for their milk. It may be months or even years before new firms are Bul. 534] An Analysis of the East Bay Milk Market 103 attracted by wide margins into the distribution of fluid milk. A pro- ducers' organization naturally will attempt to establish a price for its members' milk which will be satisfactory to most of them. It is usually the producers whose unit costs are highest who are most insistent in urging their association to demand high prices. Similarly, it is the distributors with the highest unit costs of handling milk who bring the most pressure on their trade association for the estab- lishment of a wide margin. It seems to be assumed that high prices and wide margins can be passed on to the consumer indefinitely in the form of high prices. Nevertheless the response of consumers to prices is a factor that merits the most careful consideration in all systems of collective bargaining. If buying prices are high enough to cover the costs of the least efficient producers and margins are wide enough to cover the expenses of distributors with the highest unit costs, increases in production and distribution facilities are almost sure to result. Furthermore, high retail prices of market milk will result eventually in some curtailment of consumption. If long-time stability is to be maintained in the market-milk indus- try, producers and distributors must be in possession of all the facts pertaining to the trend in consumption, production, and distribution of market milk. Not only this, but there must also be a determination on the part of both groups to act on these facts. It has been found in the past that even when the facts were available both producers and distributors have been unwilling to act on them because it would have entailed some immediate sacrifice. The collection and inter- pretation of economic data relative to the market-milk industry is for the purpose of enabling both groups to make from time to time and in an orderly manner such adjustments as will ensure long-time stability. If these facts are not acted upon, adjustment will be forced upon producers and distributors eventually and it is probable that the financial and other losses would be much greater than if adjust- ments had been made previously. Both groups are vitally interested in increasing or maintaining a high level of consumption. To this end it is essential that every effort be made to keep retail prices as low as possible. This, in turn, necessitates the utmost efficiency in production and distribution. Many distributors seem to assume that they are at all times entitled to a margin which is high enough to cover their operating expenses and provide for an adequate return on their capital and that all reductions of retail prices should be passed on automatically to pro- ducers. It is to be expected, however, that producers individually 104 University of California — Experiment Station and collectively will oppose strenuously any reduction of buying prices which may result in losses to themselves while distributors working on constant or increasing margins make no efforts to improve the system of distribution. It may be possible, occasionally, for distributors to force a reduc- tion of prices upon producers. Such a condition of affairs, however. is likely to influence producers to undertake the distribution of their own milk. This would involve a further increase in distributive facilities. It frequently results in a milk war, with its attendant losses to producers and distributors alike and loss of prestige of the market-milk industry. Experience has shown, moreover, that it is only in rare instances or under specially favorable circumstances that a producers' organization is able to distribute its members' milk successfully. The entry of producers into the distribution of market milk is highly undesirable but it can be avoided only if prices of milk are regulated from an industry and not a group viewpoint. Distributors have every right to insist that production be efficient and that prices paid to producers be regulated with a view to maintaining a volume of production commensurate with present and future con- sumption needs. Producers, on the other hand, are justified in demanding that every effort be made to increase the efficiency of distribution and that distributors' margins be regulated by the unit costs of the more efficient distributors. Efficiency in production and distribution is desirable from a public-welfare viewpoint. Milk is one of the most essential of foods. Tf retail prices are high as a result of inefficiency in the production or distribution of milk or if milk supplies are jeopardized periodically as a result of milk wars, a large part of the population of cities is deprived of an important food. This aspect of the problem has resulted in a growing demand from many city authorities and from consumer groups that market milk be declared a public utility. It is contended by such groups that the quality of market milk handled by various distributors has been so improved and standardized as a result of strict sanitary control that there is no longer any need for a multiplicity and duplication of distributive facilities. The interests of producers and distributors have been regarded in the past as being more or less conflicting. An attempt has been made in this bulletin to show that the interests of the two groups are closely interrelated and complementary. The welfare of the market- milk industry seems to demand that group interest be replaced by industry cooperation based on an intelligent interpretation of all factors affecting the supply and demand for market milk. Bul. 534] An Analysis of the East Bay Milk Market 105 ACKNOWLEDGMENTS Credit is due to Professor H. R. Tolley, Director of the Giannini Foundation of Agricultural Economics, Professors H. E. Erdman and E. C. Voorhies, and Mr. G. E. Gordon for their helpful advice and constructive criticism in the conduct of this study and preparation of the manuscript. Special acknowledgment is due to Mr. Robert E. Jones, formerly Secretary of the Alameda County Milk Dealers' Association, and to Mr. Carl Jorge, Manager of the Cooperative Dairymen's League for advice and assistance in obtaining necessary information. County Farm Advisors in the East Bay milk shed assisted the authors in making field contacts with individual producers. The following firms, associations, and departments contributed the essential data for this study: Alameda County Milk Dealers' Associa- tion; American Creamery Company; Berkeley Health Department; Borden's Farm Products Company of California; California Dairy Council ; California State Department of Agriculture Bureau of Dairy Control; Central Shuey Creamery Company; Cooperative Dairymen's League ; Dairygold Milk Company, Limited ; Dairyland Products, Inc. ; Durham Farm Creamery Company; Fenton's Creamery; Fernwood Ranch Dairy ; Golden State Milk Products Company, Limited ; Hay ward Health Department ; Oakland Dairy ; Oakland Health Department ; Pioneer Farm Dairy ; Richmond Farm Creamery ; Rich- mond Health Department ; San Francisco Health Department ; San Leandro Health Department ; San Leandro Home Dairy, Inc. ; South Berkeley Creamery; Triclover Creamery; Valley Creamery Company; and Willow Brook Dairy. 106 University of California — Experiment Station APPENDIX AGREEMENT BETWEEN COOPERATIVE DAIRYMEN'S LEAGUE AND INDIVIDUAL DISTRIBUTORS THIS AGREEMENT, made and executed in duplicate this 17th day of January by and between COOPERATIVE DAIRYMEN'S LEAGUE, a corpora- tion, hereinafter called ' 'SELLER," and hereinafter called "BUYER." WITNESSETH That Seller hereby agrees to sell and deliver to the Buyer, and Buyer hereby agrees to receive and purchase from Seller, good, sweet, unadulterated, pure, whole and marketable cow's milk in the quantities, of the quality, and otherwise upon the terms and conditions as follows, to-wit : Quantity: The Seller shall be obligated to produce, sell and deliver to Buyer and Buyer shall be obligated to receive and purchase from Seller all market milk which Buyer may or will market during the period of existence of this agree- ment, excepting milk heretofore arranged for by Buyer through other sources, as shown by the records of the City of Oakland Board of Health as of the date, any exchange or division of supply to be approved by Seller, it being of the essence hereof that Seller shall be the sole and exclusive source or agency from or through which Buyer shall, may or will purchase additional market milk during said period. Quality: All milk delivered by Seller to Buyer hereunder shall be of good quality, and shall be good, pure, sweet, unadulterated and marketable milk, fit for human consumption, and shall conform to all requirements of law and of the governmental authorities of the State of California and of the Cities of OAKLAND, BERKELEY, ALAMEDA, PIEDMONT, EMERYVILLE, ALBANY, EL CERRITO, RICHMOND, SAN LEANDRO, HAYWARD, and of any other territory or district wherein Buyer, during the existence of this Agreement, shall distribute market milk; and shall be fit for pasteurization, distribution and consumption as grade "A" market milk in the cities and territory afore- said. Seller shall not deliver, and Buyer shall not be obligated to accept and pay for, any milk which does not in all respects conform to the provisions contained in this paragraph. Buyer shall have the right to reject any milk delivered by Seller hereunder which contains any clearly perceptible foreign flavor or odor from any reason or cause whatsoever. Provided however, that in the event of such rejection, and before exercising the right to reject milk for such reason, Buyer shall first notify Seller at its office at Oakland, California, of such intended rejection, and permit an inspection of said milk by Seller or its duly authorized agent. In the event of disagreement as to the right to make such rejection, the adjudication thereof shall be referred to the proper governmental authority of the City, municipality, territory, or district in which the plant to which said milk is delivered is located, and the representative of said proper govern- mental authority shall determine the acceptance or rejection of said milk and such determination shall be final and binding on both parties. By proper governmental authority is understood the Board of Health of such subdivision. Production and Designation of Source: All milk delivered under this contract to Buyer shall be produced by and on the dairies operated by members of the first party, a list whereof is here- unto annexed marked li Exhibit A," and made a part hereof as fully to all Bul. 534] An Analysis of the East Bay Milk Market 107 intents and purposes as if set out at length herein; provided, however, that the parties hereto may, from time to time, by mutual agreement change such shippers, add others thereto, or remove some therefrom. Seller shall cause to be installed, maintained and operated in the dairy, or dairies, of the member, or members, so designated, an ice machine; and all milk to be delivered to Buyer hereunder shall, immediately after milking, be thoroughly cooled by the use of such machine to a temperature of 40° F, or lower, and shall be held at such temperature until delivery of the milk to the transportation agency. Seller shall likewise cause to be installed and maintained by such member, or members, equipment of the type approved by the authorities above desig- nated; and all milking equipment and utensils which come into contact with the milk to be delivered to Buyer hereunder shall be cleaned and sterilized immediately after each milking, in accordance with the requirements of said authorities, and each of them. Buyer and its representative shall at all times have a right to enter and examine the dairy, or dairies of the member, or members, designated as afore- said, for the purpose of inspection, and shall have the right to take samples of milk therefrom without charge to Buyer. Purchase Price: The purchase price of all milk delivered to Buyer hereunder, pavable by Buyer to Seller, shall be the sum of SEVENTY-FIVE (75) CENTS per pound butterfat for milk containing TWENTY- FIVE THOUSAND (25,000) bacteria count per cubic centimeter, or less, and the sum of SEVENTY-TWO (72) CENTS per pound butterfat for milk containing more than TWENTY-FIVE THOUSAND (25,000) bacteria count per cubic centimeter; both prices F. O. B. Buyer 's plant situate at The Buyer agrees to pay to the Seller a sum equal to ONE-HALF CENT (V 2 ) per gallon on the total volume of milk purchased from sources other than Seller. Escrow: It is provided, however, that said price, together with the selling prices hereinafter set forth, is subject to investigation through an impartial inves- tigator or committee agreeable to both parties hereto and that should said investigator or committee decide that said price is unfair to Buyer, then said price shall be reduced, but such reduction shall in no case make the price lower than SEVENTY-THREE (73) CENTS per pound butterfat. And it is agreed that, regardless of anv findings to the contrary, no price shall be established hereunder greater than SEVENTY- FIVE (75) CENTS per pound butterfat, and it is agreed that the sum of SEVENTY-THREE (73) CENTS per pound butterfat shall be paid to Seller by Buyer and that TWO (2) CENTS per pound butterfat shall be placed in escrow with a bank or trust company to be mutually agreed upon to be paid to Seller or returned to Buyer as said investigator or committee shall decree. It is understood and agreed that an investigation shall be made by the University of California and the facts and findings of said investigation shall be the guide to revision and adjustment of prices at the date of termination of this contract. Payment: The purchase price of aforesaid shall be payable by Buyer to Seller on the fifteenth (15th) day of each and every calendar month during the existence of this Agreement, for all milk received by Buyer during the preceding calendar month. All payments by Buyer to Seller, as aforesaid, shall be accompanied by a uniform statement, the form of which is approved by the DEPARTMENT OF AGRICULTURE OF THE STATE OF CALIFORNIA, explanatory of the amount thereof, including deductions; carbon copies of all such statements shall be presented to the Office of the Secretary of the ALAMEDA COUNTY MILK DEALERS' ASSOCIATION on or before the twenty-fifth (25th) day of the calendar month in which payment is made. 108 University of California — Experiment Station Weighing and Testing: For all purposes of this Agreement, a gallon of fluid milk shall be equivalent to 8.6 pounds. Milk shall be weighed and tested and the weights and tests recorded by Buyer at Buyer's plant upon receipt thereof, according to the regular course of Buyer's business; and Seller may have a representative present at such weighing, testing and recording for the purpose of verifying the same. Buyer shall facilitate in every practicable way the receipt of milk at Buyer's plant, and the tests and bacteria counts, with consequent acceptance or rejection of the milk, shall be determined in respect of each delivery; Seller shall be promptly notified by mail of the fact of each rejection of milk with brief reasons therefor. In the event that milk delivered shall otherwise fail to meet the require- ments of this Contract with consequent rejection as market milk, the Buyer shall immediately notify the Seller to that effect and shall return said milk to Seller. Lower Price: In the event that Seller at any time during the existence of this Agreement, shall sell, or offer for sale, market milk of the quality defined herein at a price lower than the purchase price to be paid by Buyer to Seller hereunder, as the same is now fixed or may hereafter be modified, in the territory wherein Buyer distributes milk, Buyer shall be entitled to a corresponding reduction of such purchase price so long as such lower price remains in effect. In the event of any happening or circumstance not under the control of the parties hereto, or either of them, tending to disrupt the established market conditions in any or all of the cities or municipalities in which milk is marketed under the terms hereof, it is agreed that any price or other conditions herein contained may be changed by mutual agreement of the parties hereto during the period of such disruption. Delivery: Buyer shall furnish all cans to contain milk to be delivered to Buyer hereunder. The delivery of milk to Buyer hereunder shall be made in conformity with the requirements and operating methods of Buyer, as Buyer may from time to time direct, establish or place in operation. Buyer, at Buyer's option, may elect to receive milk to be delivered to Buyer hereunder at Seller 's platform on a passable and accessible road in the vicinity of the ranch, or ranches, of the member, or members, of Seller who is, or are, directed by Seller to deliver milk to Buyer hereunder, as aforesaid. Buyer shall have the right to select the road, or roads, where Buyer shall receive milk, as aforesaid, provided, however, that the same shall be reasonably within the direct line of travel between said ranch, or ranches, and Buyer 's said plant. All deliveries of milk at such platform, or platforms, in the event of such election by Buyer, shall conform to the delivery transportation schedule of Buyer, as Buyer may from time to time establish and place in operation. In the event that Buyer elects to receive milk at such platform, or platforms, in pursuance of the provisions of this paragraph, the purchase prices aforesaid for milk delivered to Buyer hereunder shall be, so long as Buyer shall continue to receive milk at such platform or platforms reduced to the extent of the prevailing transportation charge then or thereafter in force for the carriage of milk from such ranch, or ranches, to the said plant of Buyer by an independent hauler. Reserve : In the event that at any time during the existence of this Agreement there occurs a labor strike, or in the event that some other cause intervenes beyond the control of either Buyer or Seller, the result of which renders it impossible or impracticable for either Seller to deliver milk to Buyer or Buyer to receive, pasteurize, or resell the same, then and in that event and during any such Buu 534] An Analysis of the East Bay Milk Market 109 period as such strike, or other intervening cause, shall continue, this Agree- ment and the respective rights and obligations of Seller and Buyer hereunder shall be suspended, and no liability shall attach to either Seller or Buyer by reason thereof during such period. Term of Contract: This Agreement shall be and remain in force for the period of Six (6) months from the 17th day of January, 1931, to the 17th day of July, 1931, inclusive, and thereafter from month to month until terminated by either party hereto by giving sixty (60) days' notice in writing to the other of its desire and intention to terminate. Selling Price: The prices at which Buver shall or may sell or offer for sale in the cities of OAKLAND, BERKELEY, ALAMEDA, PIEDMONT, EMERYVILLE, SAN LEANDRO, ALBANY, EL CERRITO, RICHMOND, or HAYWARD, or in any one of said cities, at any time during the existence of this Agreement, market milk purchased under the terms hereof, it being understood that the maintenance and stabilization of such prices are necessary and essential to the successful consummation of this Agreement, are those specified in the following schedule, to-wit: A. Retail, Delivery- Pint bottles 8 cents Quart bottles 13 cents iy 2 quarts 20 cents 3 quarts or over 12 cents per quart B. Retail, Store Pint bottles 7 cents Quart bottles 11 cents 3 quarts or over 10 cents per quart C. Wholesale V 2 pint bottles to schools 2% cents y 2 pint bottles 3 cents % pint bottles 5 cents Pint bottles 6 cents Quart bottles 9 cents All milk in cans 35 cents per gallon Boarding houses, etc., (4 quarts or more) 11 cents per quart Resale Prices: So long as this Agreement remains in force and effect, Buyer shall at all times maintain and observe, in effecting resale of milk received by Buyer hereunder, the schedule of prices hereinabove set forth. In effecting resales of milk received by Buyer hereunder at wholesale, Buyer shall collect, or invoice in event of a credit sale, in addition to the price for the milk in said schedule specified, a deposit of FIVE CENTS (5c) for each and every bottle used in the delivery of such milk. Any discount, concession, rebate, or inducement whatsoever offered or allowed by Buyer in effecting a resale of milk received by Buyer hereunder, such as a reduced price on other commodities, shall be construed as a reduction in the resale below those in said schedule specified. Waiver: A breach of any condition in this Agreement contained, and the waiver thereof by either Seller or Buyer, shall not operate as an estoppel or waiver in respect of any subsequent breach of that condition, or other conditions of the same or different nature. 110 University of California — Experiment Station Liquidated Damages: It is mutually understood and agreed that, by reason of the nature of this Agreement and the subject matter thereof, it would be impracticable and extremely difficult to fix the damage which the Buyer would or might suffer in the event of the failure on the part of Seller to sell and deliver milk to Buyer after 48 hours notice in accordance with the provisions of this Agreement, and for the purpose of providing for liquidated damages in the event of such neglect or failure, and not as a forfeiture, it is agreed that Seller shall be and become obligated to pay to Buyer as and for liquidated damage the sum of FIVE (5) CENTS for each and every gallon of milk which Seller fails or neglects to deliver to Buyer in accordance with the provisions hereof. Arbitration: In the event that the Buyer violates this contract by selling any milk furnished to it under the terms of this contract at a lesser price than herein- above agreed, in any way, either directly or indirectly or by other breach of the terms hereof the parties hereto recognize that damages will be sustained by the Seller, the amount of which will be difficult or impossible of ascertain- ment, and it is therefore agreed that said damages, the amount of which shall, by mutual agreement hereby attested, be not less than the sum of ONE HUNDRED ($100.00) DOLLARS nor more than FIVE HUNDRED ($500.00) DOLLARS for each such breach or violation, will be fixed by abitrators, and each day's violation hereof shall constitute a separate breach. Two abitrators shall be appointed by each party to this Agreement and a fifth shall be appointed by the four so appointed. The decision of three of the five arbitrators shall be binding upon the parties hereto. All fines collected hereunder shall be placed in a "Milk Fund" to be distributed to worthy charities by a joint committee to be appointed by the Alameda County Milk Dealers' Association and the Cooperative Dairymen's League. A judgment of the Superior Court in and for the County in which the arbitration is held may be entered by either party hereto on any award made by the arbitrators. In the event that Buyer violates this contract by purchasing market milk through any other source than herein specified or at any lesser price than the price herein agreed upon, Seller may, at its option, and after a decision of arbitration as above provided, suspend delivery of milk to Buyer until such breach or violation hereof shall have been corrected. It is distinctly understood and agreed that this Agreement shall in no way affect the Buyer as to any existing contracts between the Buyer and any customers of the said Buyer. And in this connection it is stipulated and agreed that nothing in this instrument contained shall be construed as limiting the right of the Buyer to comply with all such existing contracts with its customers. This Agreement shall be binding upon the assignees and/or successors in interest of each and all of the parties hereto, including the member, or mem- bers, of Seller who will deliver milk to the Buyer hereunder according to list hereto attached marked "Exhibit A." Time is of the essence hereof. IN WITNESS WHEREOF, said Seller and said Buyer have executed these presents, the day and year first hereinabove written. By COOPERATIVE DAIRYMEN'S LEAGUE, Seller By .... Buyer STATION PUBLICATIONS AVAILABLE FOR FREE DISTRIBUTION BULLETINS No. 253. 263. 279. 283. 310. 331. 343. 348. 349. 357. 361. 364. 369. 370. 371. 373. 374. 379. 386. 389. 392. 393. 394. 395. 396. 404. 406. 407. 408. 409. 410. 416. 417. 418. 419. 420. 421. 423. 425. 426. 427. 428. 431. 432. Irrigation and Soil Conditions in the Sierra Nevada Foothills, California. Size Grades for Ripe Olives. Irrigation of Rice in California. The Olive Insects of California. Plum Pollination. Phylloxera-Resistant Stocks. Cheese Pests and Their Control. Pruning Young Olive Trees. A Study of Sidedraft and Tractor Hitches. A Self-Mixing Dusting Machine for Applying Dry Insecticides and Fun- gicides. Preliminary Yield Tables for Second- Growth Redwood. Fungicidal Dusts for the Control of Bunt. Comparison of Woods for Butter Boxes. Factors Influencing the Development of Internal Browning of the Yellow Newtown Apple. The Relative Cost of Yarding Small and Large Timber. Pear Pollination. A Survey of Orchard Practices in the Citrus Industry of Southern Caii- fornia. Walnut Culture in California. Pruning Bearing Deciduous Fruit Trees. Berseem or Egyptian Clover. Fruit Juice Concentrates. Crop Sequences at Davis. I. Cereal Hay Production in California. II. Feeding Trials with Cereal Hays. Bark Diseases of Citrus Trees in Cali- fornia. The Mat Bean, Phaseolus Aconitifolius. The Dehydration of Prunes. Stationary Spray Plants in California. Yield, Stand, and Volume Tables for White Fir in the California Pine Region. Alternaria Rot of Lemons. The Digestibility of Certain Fruit Bv- Products as Determined for Rumi- nants. Part I. Dried Orange Pulp and Raisin Pulp. Factors Influencing the Quality of Fresh Asparagus After It is Harvested. Culture of the Oriental Persimmon in California. Poultry Feeding: Principles and Prac- tice. A Study of Various Rations for Fin- ishing Range Calves as Baby Beeves. Economic Aspects of the Cantaloupe Industry. Rice and Rice By-Products as Feeds for Fattening Swine. Beef Cattle Feeding Trials, 1921-24. Apricots (Series on California Crops and Prices). Apple Growing in California. Apple Pollination Studies in California. The Value of Orange Pulp for Milk Production. The Relation of Maturity of California Plums to Shipping and Dessert Quality. Raisin By-Products and Bean Screen- ings as Feeds for Fattening Lambs. Some Economic Problems Involved in the Pooling of Fruit. No. 433. Power Requirements of Electrically Driven Dairy Manufacturing Equip- ment. 435. The Problem of Securing Closer Rela- tionship between Agricultural Devel- opment and Irrigation Construction. 439. The Digestibility of Certain Fruit By- products as Determined for Rumi- nants. Part II. Dried Pineapple Pulp, Dried Lemon Pulp, and Dried Olive Pulp. 440. The Feeding Value of Raisins and Dairy By-Products for Growing and Fattening Swine. 445. Economic Aspects of the Apple In- dustry. 446. The Asparagus Industry in California. 447. A Method of Determining the Clean Weights of Individual Fleeces of Wool. 448. Farmers' Purchase Agreement for Deep Well Pumps. 449. Economic Aspects of the Watermelon Industry. 450. Irrigation Investigations with Field Crops at Davis, and at Delhi, Cali- fornia, 1909-1925. 452. Economic Aspects of the Pear Industry. 454. Rice Experiments in Sacramento Val- ley, 1922-1927. 455. Reclamation of the Fresno Type of Black-Alkali Soil. 456. Yield. Stand and Volume Tables for Red Fir in California. 458. Factors Influencing Percentage Calf Crop in Range Herds. 459. Economic Aspects of the Fresh Plum Industry. 462. Prune Supply and Price Situation. 464. Drainage in the Sacramento Valley Rice Fields. 465. Curly Top Symptoms of the Sugar Beet. 466. The Continuous Can Washer for Dairy Plants. 467. Oat Varieties in California. 468. Sterilization of Dairy Utensils with Humidified Hot Air. 469. The Solar Heater. 470. Maturity Standards for Harvesting Bartlett Pears for Eastern Shipment. 471. The Use of Sulfur Dioxide in Shipping Grapes. 472. Adobe Construction. 473. Economic Aspects of the Sheep In- dustry. 474. Factors Affecting the Cost of Tractor Logging in the California Pine Region. 475. Walnut Supply and Price Situation. 4 76. Poultry Houses and Equipment. 477. Improved Methods of Harvesting Grain Sorghum. 479. I, Irrigation Experiments with Peaches in California. II. Canning Quality of Irrigated Peaches. 480. The Use. Value, and Cost of Credit in Agriculture. 481. Utilization of Wild Oat Hay for Fat- tening Yearling: Steers. 482. Substitutes for Wooden Breakpins. 483. Utilization of Surplus Prunes. 484. The Effects of Desiccating Winds on Citrus Trees. 485. Drying Cut Fruits. 4 87. Asparagus (Series on California Crops and Prices). BULLETINS— (Continued) No. 488. 489. 491. 492. 493. 494. 495. 496. 497. 498. 499. 500. 501. 502. 503. 504. Cherries (Series on California Crops and Prices). Irrigation Water Requirement Studies of Citrus and Avocado Trees in San Diego County, California, 1926 and 1927. Olive Thinning and Other Means of Increasing Size of Olives. Yield, Stand, and Volume Tables for Douglas Fir in California. Berrv Thinning of Grapes. Fruit Markets in Eastern Asia. Infectious Bronchitis in Fowls. Milk Cooling on California Dairy Farms. Precooling of Fresh Fruits and Tem- peratures of Refrigerator Cars and Warehouse Rooms. A Study of the Shipment of Fresh Fruits and Vegetables to the Far East. Pickling Green Olives. Air Cleaners for Motor Vehicles. Dehydration of Grapes. Marketing California Apples. Wheat (Series on California Crops and Prices). St. Johnswort on Range Lands of California. Economic Problems of California Agri- culture. (A Report to the Governor of California.) No. 505. The Snowy Tree Cricket and Other Insects Injurious to Raspberries. 506. Fruit Spoilage Disease of Figs. 507. Cantaloupe Powdery Mildew in the Imperial Valley. 508. The Swelling of Canned Prunes. 509. The Biological Control of Mealybugs Attacking Citrus. 510. Olives (Series on California Crops and Prices). 511. Diseases of Grain and Their Control. 512. Barley (Series on California Crops and Prices). 513. An Economic Survey of the Los Angeles Milk Market. 514. Dairy Products (Series on California Crops and Prices). 515. The European Brown Snail in Cali- fornia. 516. Operations of the Poultry Producers of Southern California. Inc. 517. Nectar and Pollen Plants of California. 518. The Garden Centipede. 519. Pruning and Thinning Experiments with Grapes. 520. A Survey of Infectious Laryngotrache- itis of Fowls. 521. Alfalfa (Series on California Crops and Prices). CIRCULARS No. 115. 178. 212. 230. 232. 240. 241. 244. 245. 248. 249. 253. 257. 258, 259. 261. 262. 265. 269. 270. Grafting Vinifera Vineyards. The Packing of Apples in California. Salvaging Rain-Damaged Prunes. Testing Milk. Cream, and Skim Milk for Butterfat. Harvesting and Handling California Cherries for Eastern Shipment. Harvesting and Handling Apricots and Plums for Eastern Shipment. Harvesting and Handling California Pears for Eastern Shipment. Harvesting and Handling: California Peaches for Eastern Shipment. Central Wire Bracin? for Fruit Trees. Vine Pruning Systems. Some Common Errors in Vine Pruning and Their Remedies. Replacing Missing Vines. Vineyard Plans. The Small-Seeded Horse Bean (Vicia faba var. minor). Thinning Deciduous Fruits. Pear By-Products. Sewing Grain Sacks. Cabbage Production in California. Plant Disease and Pest Control. An Orchard Brush Burner. A Farm Septic Tank. No. 279. The Preparation and Refining of Olive Oil in Southern Europe. 282. Prevention of Insect Attack on Stored Grain. 288. Phylloxera Resistant Vineyards. 290. The Tangier Pea. 292. Alkali Soils. 294. Propagation of Deciduous Fruits. 296. Control of the California Ground Squirrel. 301. Buckeye Poisoning of the Honey Bee. 304. Drainage on the Farm. 305. Limine the Soil. 307. American Foulbrood and Its Control. 308. Cantaloupe Production in California. 310. The Operation of the Bacteriological Laboratory for Dairy Plants. 316. Electrical Statistics for California Farms. 317. Fertilizer Problems and Analysis of Soils in California. 318. Termites and Termite Damage. 319. Pasteurizing Milk for Calf Feeding. 320. Preservation of Fruits and Vegetables by Freezing Storage. 321. Treatment of Lime-induced Chlorosis with Iron Salts. 322. An Infectious Brain Disease of Horses and Mules (Encephalomyelitis). 10m-6,'32